As filed with the Securities and Exchange Commission on October 31, 2000
Registration No. 333-____
==============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
MAGNITUDE INFORMATION SYSTEMS, INC.
(Name of small business issuer in its charter)
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Delaware 7372 75-2228828
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
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401 State Route 24, Chester, New Jersey 07930
(908) 879-2722
(Address and telephone number of principal executive offices and
place of business)
Steven D. Rudnik
401 State Route 24, Chester, New Jersey 07930
(908) 879-2722
(Name, address and telephone number of agent for service)
With Copies To:
Joseph J. Tomasek, Esq.
75-77 North Bridge Street
Somerville, New Jersey 08876
(908) 429-0030
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after
the effective date of this registration statement.
If any securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462 (b) under the Securities Act, check the following box and
list the Securities Act registration number of the earlier effective
registration statement for the same offering. [ ] ____________.
If this form is a post-effective amendment filed pursuant to Rule 462
(c) under the Securities Act, check the following box and list the Securities
Act registration number of the earlier effective registration statement for the
same offering. [ ] ____________.
If this form is a post-effective amendment filed pursuant to Rule 462
(d) under the Securities Act, check the following box and list the Securities
Act registration number of the earlier effective registration statement for the
same offering. [ ] ____________.
If delivery of the prospectus is expected to be made pursuant to
Rule 434, check the following box. [ ]
<PAGE>
Calculation Of Registration Fee
===============================================================================
PROPOSED PROPOSED PROPOSED
TITLE OF MAXIMUM MAXIMUM MAXIMUM
SECURITIES AMOUNT OFFERING AGGREGATE
TO BE TO BE PRICE PER OFFERING AMOUNT OF
REGISTERED(1) REGISTERED SHARE PRICE REGISTRATION FEE
-------------------------------------------------------------------------------
Up to
Common Stock 2, 386,364 shares(1) (2) $1,715,199 $519.76
$.0001 par value per share
Up to
Common Stock 1,193,181 shares(3) (3) $ 857,599(1) $259.88
$.0001 par value per share
Up to
Total 3,579,545 shares(1) $2,572,798(1) $799.64
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(1) Estimated solely for the purpose of computing the registration fee
required by Section 6(B) Of the Securities Act and computed pursuant
to Rule 457(C) under the Securities Act Based upon the average of the
high and low prices of the Common Stock on October 24, 2000 as
reported on the Electronic Bulletin Board Over-The-Counter Market
maintained by The National Association Of Securities Dealers, Inc.
2) The price per common share to be paid by Torneaux Fund Ltd.
will vary based on a formula described in the common stock purchase
agreement we signed with Torneaux and is described elsewhere in this
registration statement.
(3) The remainder of the shares to be registered are issuable upon the
exercise of warrants to purchase common stock. The warrants are
issuable to Torneaux from time to time when Magnitude exercises
its right to sell shares of common stock to Torneaux pursuant to a
draw down. The exercise price of the warrants will be equal to 115%
of the price per share paid by Torneaux upon a draw down.
----------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SUCH SECTION 8(A), MAY DETERMINE.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL AND COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
2
<PAGE>
Prospectus
Magnitude Information Systems, Inc.
3,579,545 Common Shares
o The information in this prospectus is not complete and may be changed. We
may not sell these securities until the registration statement filed with
the Securities and Exchange Commission is effective. This prospectus is not
an offer to sell these securities and it is not soliciting an offer to buy
these securities in any state where the offer or sale is not permitted.
o This prospectus relates to the resale by the selling stockholder, Torneaux
Fund Ltd.. of up to 3,579,545 shares of our common stock. The selling
stockholder may sell common stock from time to time in the principal market
in which our stock is traded at the prevailing market price or in
negotiated transactions.
o We will not receive any proceeds from the sale of the shares by the selling
stockholder. However, we will receive the sale price of any common stock
that we sell to Torneaux under the common stock purchase agreement
described in this prospectus or upon the exercise for cash of the warrants
issuable to Torneaux when exercised. We will pay the costs of registering
the shares under this prospectus, including legal fees.
o Our common stock is traded in the over-the-counter market and quoted on the
OTC Bulletin Board under the symbol "MAGY". On October 24, 2000 the average
of the high and low price of our common stock was $.71 per share as
reported on the OTC Bulletin Board.
o Investing in the common stock involves a high degree of risk. You should
invest in the common stock only if you can afford to lose your entire
investment. See "Risk Factors" beginning at page 8 of this prospectus.
The date of this prospectus is __________, 2000
3
<PAGE>
Please read this prospectus carefully. You should rely only on the
information contained in this prospectus. We have not authorized anyone to
provide you with different information. You should not assume that the
information provided by the prospectus is accurate as of any date other than the
date on the front of this prospectus.
The following table of contents has been designed to help you find
important information contained in this prospectus. We encourage you to read the
entire prospectus.
Table Of Contents
Page
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Forward Looking Statements..............................................4
Prospectus Summary .....................................................5
Summary Consolidated Financial Data ....................................7
Risk Factors ...........................................................8
The Offering...........................................................14
Use of Proceeds .......................................................15
Price Range of Common Stock ...........................................15
Dividend Policy .......................................................15
Management's Discussion and Analysis of Financial Condition and
results of Operations ..............................................16
Business ..............................................................25
Management ............................................................33
Certain Transactions ..................................................38
Principal Stockholders ................................................39
Selling Stockholder ...................................................41
Plan of Distribution ..................................................42
Description of Capital Stock ..........................................44
Legal Matters .........................................................46
Additional Information ................................................47
Index to Financial Statements .........................................48
Forward Looking Statements
When used in this Prospectus, the words or phrases "will likely
result," "are expected to," "will continue," "is anticipated," "estimate,"
"projected," "intends to" or similar expressions are intended to identify
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such statements are subject to certain risks and
uncertainties, including but not limited to economic conditions, changes in laws
or regulations, the Company's history of operating losses, demand for its
software products and services, newly developed technologies and software,
regulatory matters, protection of technology, lack of industry standards, the
ability to obtain contracts and licensing sales, the effects of competition and
the ability of the Company to obtain additional financing. Such factors, which
are discussed in "Risk Factors," "Business" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the notes to
consolidated financial statements, could affect the Company's financial
performance and could cause the Company's actual results for future periods to
differ materially from any opinions or statements expressed with undue reliance
on any such forward-looking statements, which speak only as of the date made.
See "Risk Factors," "Business" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
4
<PAGE>
Prospectus Summary
This summary highlights information that we present more fully in the
rest of this prospectus. You should read the entire prospectus carefully.
Magnitude Information Systems, Inc.
All references to "Magnitude Information Systems, Inc.", "Magnitude" or
the "Company" , refers to us or we throughout this prospectus. Our primary
product is an integrated suite of proprietary software modules marketed under
the name "ErgoManagerTM" which are designed to help individual computer users
and businesses increase productivity and reduce the risk of potentially
preventable repetitive stress injuries, referred to as "RSI". These software
modules can be applied individually or together in a comprehensive ergonomic and
early intervention program that seeks to modify a user's behavior by monitoring
computer usage patterns over time and warning the user when to break a dangerous
trend in repetitive usage of an input device, such as a keyboard or mouse. The
product was developed to train people working on computers, monitor computer-use
related activities and evaluate a user's risk exposure and propensity towards
injury or loss of effectiveness in connection with his/her day-to-day work.
Moreover, the software enables a company to not only address the issue of health
risks involving employees and to minimize resulting potential liabilities, but
delivers a powerful tool to increase overall productivity.
Background
On June 24, 1997, the Company entered into an acquisition agreement
whereby it acquired substantially all of the outstanding stock of Proformix,
Inc., a Delaware corporation and manufacturer of ergonomic keyboarding
systems.Proformix, Inc. in November 1998 changed its name to Magnitude, Inc. and
is hereafter referred to as Magnitude, Inc. The business combination took the
form of a reverse acquisition. The Company and Magnitude, Inc. remain as two
separate legal entities whereby Magnitude, Inc. operates as a subsidiary of
Magnitude Information Systems, Inc.. The operations of the newly combined entity
are currently comprised solely of the operations of Magnitude, Inc.
On February 2, 1998, the Company entered into an Agreement and Plan of
Merger with Rolina Corporation, a privately held New Jersey software developing
firm, and on April 30, 1998, into an Asset Purchase Agreement with Vanity
Software Publishing Co., a Canadian developer of specialized software, whereby
the Company, in return for payments in form of cash and equity, acquired the
rights to certain software products and related assets, with such software
products subsequently forming the basis for the further development during the
year of the Company's proprietary ErgoManagerTM software product.
On November 18, 1998, the Company and its wholly owned subsidiary
Magnitude, Inc. entered into an Asset Purchase Agreement and several related
agreements with 1320236 Ontario Inc., a publicly traded Canadian designer,
manufacturer and distributor of office furniture, pursuant to which it acquired
Magnitude, Inc.'s hardware product line comprised of ergonomic keyboard platform
products and accessories, and all related inventory and production tooling and
warehousing assets, and all intellectual property rights including the Proformix
name, against a cash consideration and certain royalty payments on OS' sales of
the Proformix hardware products. With the sale of the hardware product line, the
Company's business is now focused exclusively on the further development and
marketing of its new software products. This development comes against the
backdrop of the issuance of a patent by the US Patent and Trademark Office on
the Company's patent application for certain design principles underlying its
ErgoManagerTM software.
5
<PAGE>
The Offering Summary
Total shares of common stock
outstanding as of June 30,
2000............................ 15,479,163
Shares of common stock being
offered forresale by the selling
stockholder..................... Up to 3,579,545 shares, assuming the sale of
all of the shares registered in connection
with the common stock purchase agreement and
exercise of all warrants by the selling
stockholder.
Offering Price.................. Market price or negotiated prices at the time
of resale.
Use of Proceeds................. We will not receive any of the proceeds of the
shares offered by the selling stockholder. Any
proceeds we receive from our sales of common
stock to Torneaux Fund Ltd. and the exercise
of warrants working capital and other general
corporate purposes.
OTC Bulletin Board
Symbol.......................... MAGY
6
<PAGE>
Summary Consolidated Financial Data
This summary of consolidated financial data has been derived from our
annual and interim consolidated financial statements included elsewhere in this
prospectus. You should read this information in conjunction with those financial
statements, and notes thereto, along with the section entitled "Management's
Discussion and Analysis of Financial Condition."
<TABLE>
<CAPTION>
Six months
Year Ended December 31, ended June 30
-------------------------------- -----------------
Consolidated Statement of Operations 1998 1999 2000
Data: ----------- --------- -----------------
(Unaudited)
<S> <C> <C> <C>
Revenue $2,926,455 $ 263,553 $ 348,003
Loss from operations 2,588,762 (2,642,989) (1,474,583)
Net Loss (2,530,909) (2,391,948) (1,594,527)
Loss per Share
Basic (0.58) (0.28) (0.11)
Diluted (0.58) (0.28) (0.11)
Working Capital (deficiency) (2,145,611) (3,541,257) (110.594)
Total Assets 2,098,207 2,220,223 2,703,130
Stockholders' Equity (impairment) (2,061,872) (2,280,945) 826,314
</TABLE>
Consolidated Balance Sheet Data: As of June 30, 2000
-------------------------
(Unaudited)
Cash and cash equivalents................................ $ 401,121
Working Capital (deficiency)............................. (110,594)
Total Assets............................................. 2,703,130
Total Liabilities........................................ 1,876,816
Stockholders' Equity..................................... 826,314
7
<PAGE>
Risk Factors
You should carefully consider the risks described below when evaluating
your ownership of the Magnitude common stock. The risks and uncertainties
described below are not the only ones Magnitude faces. Additional risks and
uncertainties we are presently not aware of or that we currently consider
immaterial may also impair Magnitude's business operations.
If any of the following risks actually occurs, Magnitude's business,
financial condition or results of operations could be materially adversely
affected. In such case, the trading price of the Magnitude common stock could
decline significantly.
We Continue to Suffer Losses and We Are Not Profitable.
We have a history of losses and if we do not achieve profitability we
may not be able to continue our business in the future. We have incurred
substantial operating losses since our inception, which has resulted in an
accumulated deficit of approximately $11,298,013 as of December 31, 1999 of
which approximately $7 million are attributable to its discontinued hardware
product line. For the fiscal years ended December 31, 1999 and 1998, we incurred
losses of $2,391,948 and $2,530,909, respectively. For the six month period
ended, June 30, 2000, we had additional losses of $1,594,527. We have financed
our operations primarily through the sales of equity and debt securities. Our
expense levels are high and our revenues are difficult to predict. We anticipate
incurring additional losses until we increase our client base and revenues. We
may never achieve or sustain significant revenues or profitability. If we are
unable to achieve increased revenues, we will continue to have losses and may
not be able to continue our operations.
We Will Need Additional Financing.
We could be required to cut back or stop operations if we are unable to
raise or obtain needed funding. Our ability to continue operations will depend
on our positive cash flow, if any, from future operations or our ability to
raise additional funds through equity or debt financing. In February, 2000 we
received a firm commitment for private financing of $3.0 million of equity in
order to obtain the working capital necessary to continue to finance our
operations and execute our business plan. Although we anticipate that future
revenues and our current cash balance will be sufficient to fund our current
operations and capital requirements for the current fiscal year, we cannot give
you any assurance that we will not need additional funds before such time. On
October 6, 2000, we signed an agreement with Torneaux Fund Ltd., a Bahamian
Island based company that may permit us to sell between $1.2 million and $4.2
million worth of our common shares, at our option and at discounts ranging from
9.5% to 12% of the average market price of our common shares, depending upon our
successful registration of additional Company common shares under federal
securities laws and depending upon the prevailing market price of our common
stock. Other than this possibility to sell additional equity and obtain funds,
we have no current arrangements for additional financing and we may not be able
to obtain additional financing on commercially reasonable terms, if at all. We
could be required to cut back or stop operations if we are unable to raise or
obtain funds when needed.
8
<PAGE>
Our Business is New and We Have Had Limited Sales of Our Products.
We have a limited operating history as a software product company and
have made only limited sales of our products. Our total revenues for software
sales and licenses for the years ended December 31, 1999 and 1998 were
approximately $260,703 and $72,486, respectively. For the six month period ended
June 30, 2000 we have revenues of only $348,003.
Our Software Products Are Untested in the Marketplace.
Our revenues depend on sales of our specialized software products and
we are uncertain whether there will be broad market acceptance of these
products. Our revenue growth for the foreseeable future is largely dependent
upon increased sales of our ErgoManagerTMsuite of software products. Since the
introduction of our ErgoManagerTM software products in November, 1998 and
through December 31, 1999 revenue from our software products has been
approximately $270,000 (prior to this time, we had sales of approximately
$63,000 based upon a predecessor version of the ErgoManagerTM software}. For the
six month period ended June 30, 2000, we had revenues from the sales of software
product licenses of $329,342. Our future financial performance will depend upon
the successful introduction and customer acceptance of our ErgoManagerTM
software products as well as the development of new and enhanced versions of
this product as well as other related software products that may be developed in
the future. Revenue from products such as ErgoManagerTM depend on a number of
factors, including the influence of market competition, technological changes in
the ergonomic workplace market, our ability to design, develop and introduce
enhancements on a timely basis and our ability to successfully establish and
maintain distribution channels. If we fail to achieve broad market acceptance of
our ErgoManagerTM products, it would have a material adverse effect on our
business, operating results and financial condition.
We Do Not Have A Sales Distribution Network or Strategic Sales Partners.
Inability to enter into strategic relationships with indirect channel
partners could have a material adverse effect on us. As part of our sales and
marketing efforts, we are seeking to develop strategic relationships with
indirect channel partners, such as original equipment manufacturers and
resellers. We have limited financial, personnel and other resources to undertake
extensive marketing activities ourselves. Therefore, our software products will
depend on our ability to develop and maintain strategic marketing relationships
with indirect channel partners and their ability to market and distribute our
software products. If we are unable to enter into and maintain such arrangements
or if such arrangements do not result in the successful commercialization of our
software products, then this could have a material adverse effect on our
business, operating results and financial condition.
You May Lose Your Entire Investment in Our Stock.
The common stock offered hereby is highly speculative,
involves a high degree of risk and should not be purchased by any person who
cannot afford the loss of his entire investment. A purchase of our common stock
in this offering would be unsuitable for a person who cannot afford to sustain
such a loss.
9
<PAGE>
Our Business Depends Upon the Continued Efforts of a Select Few People.
We are substantially dependent upon the continued services of
Steven D. Rudnik, our President and Chief Executive Officer. The loss of the
services of Mr. Rudnik through incapacity or otherwise would have a material
adverse effect upon our business and prospects. To the extent that his services
become unavailable, we will be required to retain other qualified personnel, and
there can be no assurance that we will be able to recruit and hire qualified
persons upon acceptable terms. We do, however, maintain key person life
insurance on the life of Mr. Rudnik in the amount of $1 Million.
In addition, we believes that our future prospects will depend in large
part upon our ability to attract, train and retain highly-skilled technical,
managerial, sales and marketing personnel. However, competition for personnel in
the software industry is intense, and, at times, we have had difficulty locating
candidates with appropriate qualifications within various desired geographic
locations, or with certain industry-specific expertise. If our competitors
increase their use of non-compete agreements, the pool of available technical
personnel may further narrow in certain jurisdictions, even if the non-compete
agreements are ultimately unenforceable. The failure to attract, train, retain
and manage productive sales and sales support personnel would have a material
adverse effect on our business, financial condition and results of operations.
If we lose the services of one or more of our key employees, our
business, operating results, financial condition or business prospects could be
materially adversely affected. We have several programs in place to retain key
personnel, including granting of stock options that vest annually over four or
five years. A number of key employees have vested stock options with exercise
prices lower than our current stock price. These potential gains provide these
employees the economic freedom to explore personal objectives both within and
outside of our Company, which may result in the loss of one or more key
employees during the coming years.
It is widely recognized that the software industry in which we compete
is at or beyond a condition of full employment. We may not be able to attract,
train and retain the personnel it requires to develop, market, sell and support
new or existing software or to continue to grow. Also, to penetrate successfully
key vertical markets, we must attract, train and retain personnel with
industry-specific expertise.
Our Stock is a "Penny Stock" and is Subject to Strict Offering Regulations.
The Securities Enforcement Penny Stock Act of 1990 requires
specific disclosure to be made available in connection with trades in the stock
of companies defined as "penny stocks". The Commission has adopted regulations
that generally define a penny stock to be any equity security that has a market
price of less than $5.00 per share, subject to certain exceptions. Such
exceptions include any equity security listed on NASDAQ and any equity security
issued by an issuer that has (I) net tangible assets of at least $2,000,000, if
such issuer has been in continuous operation for three years; (ii) net tangible
assets of at least $5,000,000, if such issuer has been in continuous operation
for less than three years; or (iii) average annual revenue of at least
$6,000,000, if such issuer has been in continuous operation for less than three
years. Unless an exception is available, the regulations require the delivery,
prior to any transaction involving a penny stock, of a disclosure schedule
explaining the penny stock market and the risk associated therewith aswell as
the written consent of the purchaser of such security prior to engaging in a
penny stock transaction. The regulations on penny stocks may limit the ability
of the purchasers of our securities to sell their securities in the secondary
marketplace. Our common stock is currently considered a penny stock.
10
<PAGE>
There is Intense Competition in the Industry
The market for ergonomic application software is expected to become
intensely competitive. Although we are not aware of any ergonomic software that
competes with our ErgoManagerTM software products currently, competitors will
certainly enter this marketplace. Although we believe our success will be due in
part to our early entry into the computer workplace market, we expect other
software product manufacturers to develop and sell similar products.
Intense competition could lead to increased price competition in the
market, forcing us to reduce prices. As a result, our gross margins may decline
and we may lose our first-to-market advantage which, in turn, could have a
material adverse effect on our business, financial condition and results of
operations. In addition, we may be unable to compete successfully with any new
competitors.
The computer software industry and products developed for the computer
workplace face intense competition. We will be at a competitive disadvantage in
seeking to compete with other companies having more assets, larger technical
staffs, established market shares and greater financial and operational
resources than us. There can be no assurance that we will be able to meet the
competition and operate profitably.
Magnitude Has Limited Protection of Intellectual Property and Proprietary
Rights and May Potentially Infringe Third Party Intellectual Property Rights
We consider certain aspects of our software and documentation to be
proprietary, and rely on a combination of contract, patent, copyright, trademark
and trade secret laws and other measures to protect this information.
Outstanding applications may not result in issued patents and, even if issued,
the patents may not provide any meaningful competitive advantage. Existing
copyright laws afford only limited protection. We believe that the rapid pace of
technological change in the computer software industry has made patent, trade
secret and copyright protection less significant than factors such as:
o knowledge, ability and experience of our employees;
o frequent software product enhancements; and
o timeliness and quality of support services.
Patent, trade secret and copyright protections may be inadequate, and
our competitors may independently develop ergonomic software products that are
substantially equivalent or superior to our software products. We do not believe
that our software products, our trademarks or other proprietary rights infringe
on the property rights of any third parties. However, third parties may assert
infringement claims against us and our products. These assertions could require
us to enter into royalty arrangements or could result in costly litigation.
11
<PAGE>
We May Experience Product Liability Claims.
Although our license agreements contain provisions designed to limit
our exposure to potential product liability claims, these provisions could be
invalidated by unfavorable judicial decisions or by federal, state or local laws
or ordinances. Although we have not experienced any product liability claims to
date, use of our software in mission critical applications may create a risk
that a third party may pursue a claim against us. Although we carry product
liability insurance, if a product liability claim against us was successful, the
resulting damages or injunctive relief could have a material adverse affect on
our business, financial condition and results of operations.
We Have Not Paid any Dividends and Are Not Likely to Pay Any Dividends On Our
Common Stock in the future
We have not declared or paid any dividends on our common stock, and do
not anticipate paying any dividends for the foreseeable future. In addition, the
holders of shares of our preferred stock are entitled to receive, out of any
legally available funds, cumulative dividends equal to varying percentages,
depending upon which of three series of preferred shares outstanding, of the
liquidation preferences of these shares. All dividends must be paid on our
preferred stock before any may be declared or paid on the common stock.
Our Stock Price is Volatile and There is a Risk of Litigation
The trading price of our common stock has in the past and may in the
future be subject to wide fluctuations in response to factors such as the
following:
o revenue or results of operations in any quarter failing to
meet the expectations, published or otherwise, of the
investment community;
o announcements of technological innovations by us or our competitors;
o new products or the acquisition of significant customers by us or
our competitors; o developments with respect to patents, copyrights or
other proprietary rights by us or our competitors; o changes in
recommendations or financial estimates by securities analysts; o
conditions and trends in the software industry generally; o general
market conditions and other factors.
Further, the stock market has experienced in recent months and may
continue in the future to experience extreme price and volume fluctuations that
particularly affect the market prices of equity securities of high technology
companies that often are not related to or are disproportionate to the operating
performance of such companies. These broad market fluctuations, as well as
general economic, political and market conditions have, and may continue to
have, a material adverse effect on the trading price of our common stock.
Fluctuations in the price of our common stock may expose us to the risk of
securities class action lawsuits. We cannot assure you that there will not be
lawsuits in the future or that future lawsuits will not have a material adverse
effect on our business, financial condition and results of operations. Future
sales of our common stock pursuant to this prospectus and the exercise of
outstanding options and warrants may adversely affect our stock price and your
percentage of ownership.
12
<PAGE>
Sales of a substantial number of shares of our common stock in the
public market could cause a reduction in the market price of our common stock.
Through this offering, Torneaux Fund, Ltd. may be reselling up to 3,579,545
shares of our common stock. In addition, as of June 30, 2000, there were
outstanding preferred shares and other convertible instruments, warrants and
options convertible or exercisable to purchase an aggregate of 14,664,828 shares
of our common stock. The majority of the options and warrants have exercise
prices below the current trading price of our common stock. As a result of this
offering and future issuances of our common stock pursuant to the convertible
securities and instruments, options or warrants, a substantial number of shares
of our common stock will become available for resale which could have a material
and adverse effect on the market price of our common stock. Further, this may
have a detrimental impact on the terms under which we may obtain financing
through a sale of our common stock in the future by hindering our ability to
raise capital at a higher market price due to the dilutive effect to new
investors. For these reasons, any evaluation of the favorability of market
conditions for subsequent stock offering must take into account any outstanding
convertible securities and instruments, warrants and options.
The Software Business Constantly Changes and We May not Be Able to Respond
Quickly to These Changes.
The market for software is characterized by rapid technological
advances, changes in customer requirements and frequent new product
introductions and enhancements. The Company must respond rapidly to developments
related to operating systems and applicable programming languages. Such
developments will require the Company to continue to make substantial product
development investments. Any failure by the Company to anticipate or respond
adequately to technological developments and customer requirements, or any
significant delays in product development or introduction, could result in a
loss of competitiveness or revenue.
The Company's future success will depend on its ability to continue to
enhance its current product line and to continue to develop and introduce new
products that keep pace with competitive product introductions and technological
developments, satisfy diverse and evolving customer requirements and otherwise
achieve market acceptance. There can be no assurance that the Company will be
successful in continuing to develop and market on a timely and cust-effective
basis fully functional product enhancements or new products that respond to
technological advances by others, or that its enhanced and new products will
achieve market acceptance. In addition, the Company has in the past experienced
delays in the development, introduction and marketing of new or enhanced
products, and there can be no assurance that the Company will not experience
similar delays in the future. Any failure by the Company to anticipate or
respond adequately to changes in technology and customer preferences, or any
significant delays in product development or introduction, would have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Patents and New Products" and "Research and Development" below.
13
<PAGE>
The Offering
Common Stock Purchase Agreement
We are registering 3,579,545 shares of our common stock in connection
with our common stock purchase agreement with Torneaux Fund Ltd. On
October 6, 2000, we entered into a common stock purchase agreement and
related agreements with Torneaux , a private equity fund organized under the
laws of the Bahamas. Subject to the fulfillment of certain conditions, the
agreements provide us with a facility through which we may sell shares of our
common stock, at our option, to Torneaux periodically over a 15 month period.
Our ability to request a draw down under the common stock purchase agreement is
subject to the continued effectiveness of a resale registration statement filed
with the Securities and Exchange Commission to cover the shares to be issued.
The amount of common stock to be sold at each draw down will not be less than
$100,000 nor more than $350,000. We have agreed to sell our shares to Torneaux
at a price equal to the then current market price of our common stock during the
draw down period, less a discount of between 9.5% and 12% specifically
determined based upon a formula related to the then current market price of the
stock, but which purchase price may not be less than $1.00. Accordingly,
Torneaux is obligated to purchase our common shares at our election if the
average daily current market price is at least $1.00. The number of shares that
we may sell to Torneaux varies depending on certain factors, including the then
current ownership interest of our common stock by Torneaux. We have also agreed
to issue to Torneaux warrants to purchase from 30% to 50% of the number of
shares of common stock being purchased at the time of each draw down. Torneaux
will either resell its shares of our common stock in the open market, resell its
shares of our common stock to other investors in negotiated transactions or hold
shares of our common stock in its portfolio. This prospectus covers the resale
by Torneaux of common stock purchased by Torneaux and issuable upon exercise of
the related warrants either in the open market or to other investors.
14
<PAGE>
Use Of Proceeds
We will not receive any proceeds from the resale of shares of common stock by
Torneaux, the selling stockholder. Torneaux will receive all of the net
proceeds from the resale of any of our common shares offered in this
Prospectus. However, we will receive the sale price of any common stock we sell
to Torneaux under the common stock purchase agreement described in this
prospectus and upon the exercise of warrants issuable to Torneaux when it pays
the exercise price in cash. We expect to use the proceeds of any such sales for
general working capital purposes.
Market For Registrant's Common Equity And Related Shareholder Matters
.The Company's Common Stock currently trades on the Electronic Bulletin
Board, over-the counter market, under the symbol "MAGY". The following table
sets forth, for the calendar quarters indicated, and for the last two years, the
high and low sales prices for the Company's Common Stock:
High/Ask low/Bid
1998
First Quarter ..................... $ 5 7/8 $4 3/8
Second Quarter ................... 5 7/8 3 3/4
Third Quarter ..................... 4 3/4 1 1/4
Fourth Quarter ................... 2 5/8 3/4
1999
First Quarter................. $ 1.37 $0.41
Second Quarter.............. 0.81 0.53
Third Quarter ..................... 1.09 0.55
Fourth Quarter ................... 0.76 0.42
2000
First Quarter.................. $ 4.75 $0.42
Second Quarter .............. 2.88 0.95
Third Quarter................. 1.43 0.71
As of June 30, 2000, there were approximately 238 shareholders of
record for the Company's Common Stock. The number of record holders does not
include shareholders whose securities are held in street name.
Dividend Policy
The Company has not declared or paid, nor has it any present intention
to pay, cash dividends on its Common Stock. The Company is obliged to pay cash
dividends on its outstanding convertible preferred stock and, under certain
circumstances, on its outstanding cumulative preferred stock. See "DESCRIPTION
OF CAPITAL STOCK" - "The Series A Stock", "The Series B Stock" and "The Series C
Stock", below.
15
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Six Months Ended June 30, 2000, Compared to Six Months Ended June 30, 1999
Results of Operations:
The first two quarters in 2000 showed a substantial relative increase
in revenues over the corresponding quarters in 1999. Also, revenues for the
second quarter in 2000 more than doubled from the first three months this year.
Although in absolute terms, revenues have not yet grown to a level that will
cover ongoing expenses management considers the sales results for the period
significant insofar as they appear to validate the Company's marketing strategy
of lowering entry barriers by closely cooperating with larger potential clients
in introducing the proprietary ErgoManager(TM) software through pilot projects
at selected worksites, thereby creating the necessary credibility and awareness
of the product's unique potential in the areas of productivity enhancement and
risk reduction with respect to repetitive stress injuries, in the office
environment. Even though relatively time consuming, pilot projects involving
smaller numbers of employees provide a potential client with an opportunity to
test the software's utility and reliability, systems and network friendliness,
and staff acceptance without incurring the perceived risk associated with an
immediate enterprise-wide installation of a new product.
During the last quarter, three companies and government agencies have
converted from pilot programs to full deployment of the ErgoManager(TM)
software, two of which, the insurance company 21st Century Insurance Co. and the
California State Controller's Office, are located in the State of California
which in 1998 pioneered legislation that requires businesses to monitor and
manage employees who work on computers in order to mitigate health risks and
which was followed by proposals for similar legislation, in the states of North
Carolina and Washington and by the U.S. Federal OSHA. Although market acceptance
of the Company's products, in management's opinion does not depend on the
passing of such legislation, compliance motivation with respect to actual or
proposed law constitutes an important element in the Company's marketing
strategy.
Revenues for the six months ended June 30, 2000, amounted to $348,003
compared to $110,180 for the same period in 1999, with all such revenues
generated by the Company's wholly owned subsidiary Magnitude, Inc. from the
licensing of the Company's proprietary ErgoManager(TM) software. Gross profits
amounted to $263,349 for a 76% gross margin. Gross profits are burdened with a
fixed charge for amortization of software investments. Software assets
underlying the Company's products are being amortized on a straight line over 10
years, resulting in a level charge of approximately $12,000 per month to
cost-of-goods-sold. Since variable product costs are low, the gross margin is
expected to further increase as revenues grow. After deducting selling expenses
and general and administrative expenses totaling $1,737,932 the Company realized
an operating loss of $1,474,583, compared to an operating loss of $1,267,532 for
the first six months in 1999. Non-operating expenses totaled $119,944 and
include $132,843 net interest expense and $14,921 in miscellaneous income from
royalty payments in connection with the 1998 divestiture of the former
keyboarding systems product line. The net result for the period was a loss of
$1,594,527 or $0.11 per share, compared to a loss of $1,309,623 or $0.17 per
share for the same period last year.
16
<PAGE>
The two quarter's net result was strongly affected by the continuing
expansion of marketing and sales operations resulting in a sharp increase of
selling expenses, which almost doubled from the level a year ago. The Company is
undertaking pioneering efforts in educating future customers and the business
community at large about the merits of a pro-active stance in dealing with the
growing level of health risks and potential liabilities associated with
repetitive stress injuries in the computer workplace environment. Management
believes that these efforts are justified by the potential rewards accruing from
this "First to Market" approach which should lead to a strong competitive
advantage and a sizable market share during the years to come. The Company will
continue to invest in a comprehensive marketing campaign with the goal of
accelerating the education of potential clients and promoting the name and
products of the Company. This process, however, takes time and while management
is confident of the ultimate success of its strategy it is not in a position to
predict the timing with any degree of certainty.
As part of its overall marketing plan, the Company negotiated several
joint venture-, joint marketing-, and distribution agreements with, among
others, AON Ergonomic Services (a division of insurance industry leader AON
Corporation), The Speech Centre Training Group (U.K.) , CapitalReps
(organization specializing in sales of computer products to the federal
government). In January 2000, Anderson Consulting LLP and the Company entered
into an agreement whereby Anderson will include the Company's products in their
prestigious "Ideas Exchange" showcase. This agreement is of special significance
because it will introduce the Company to a potentially large audience of key
corporate clients. In order to take advantage of the wide reach of the Internet,
the Company just completed a distribution agreement with a key e-commerce
marketer - Big Planet Inc., whereby Big Planet will offer the Company's products
directly to Internet users and through its vast network of independent
distributors.
During the second quarter, agreements were negotiated with Automated
Systems, Inc. (ASI), the well known high level systems integrator headquartered
in Chicago, and Protegrity Services, Inc., one of the largest privately held
workers' compensation service companies in the United States, serving over
18,000 business customers in 17 states. These partnerships are expected to
facilitate the Company's access to key prospects and accelerate market entry and
acceptance for the Company's software products.
Liquidity and Capital Resources:
As already reported for the prior fiscal year, the Company during 2000
continued receiving new equity investments through private placements with
accredited investors and agreed with certain other investors to convert larger
amounts of debt into equity. These transactions further improved the balance
sheet of the Company and firmed up the Company's financial profile so that, at
June 30, 2000 and in spite of the loss from operations, stockholders' equity
increased to $826,314 compared to a deficit in excess of $2.2 Million at the end
of the previous fiscal year. During the same time, the working capital deficit
was reduced from $3,541,257 to $110,594.
17
<PAGE>
In February, the Company had obtained a firm commitment from a previous investor
to act as placement agent for a capital raising effort to obtain new equity
capital of $3 Million through private placement subscriptions by accredited
investors. By June 30, 2000, the Company had received a total of $2.25 Million
under this program. The remaining $.75 Million were originally also scheduled
for the second quarter but have been rescheduled for transfer during the third
quarter of this year. In addition, the Company received $200,000 pursuant to
equity investments from other private investors. Aside from attracting new
capital in the form of equity investments, the Company between January 1, 2000
and June 30, 2000 has converted an aggregate of $2,287,545 short-term debt into
equity in form of common stock and convertible preferred stock and restructured
a $374,890 short-term liability into a long-term convertible obligation. These
financing transactions more than offset the negative cash flow from operations
of approximately $1,705,000 during the first six months of the year. The Company
has no bank debt.
To further augment available financial resources, we entered into a
common stock purchase agreement on October 6, 2000 with Torneaux Fund Ltd., an
investment fund headquartered in the Commonwealth of The Bahamas, which provides
for an equity draw down facility. See "the subsection of this prospectus
entitled "Common Stock Purchase Agreement" in the "The Offering" section, above.
Fiscal Year Ended December 31, 1999, Compared to Fiscal Year Ended December
31, 1998
The selected financial information presented below under the captions
"Statement of Operations" and "Balance Sheet" for the years ended December 31,
1999 and 1998 is derived from the audited financial statements of the Company
and should be read in conjunction with the financial statements and notes
thereto.
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Balance Sheet December 31,
1999 1998
----------------- ----------------------
<S> <C> <C>
Total assets ............................. $ 2,220,223 $ 2,098,207
Current liabilities ...................... 4,465,413 2,718,240
Long-term debt ........................... 35,755 1,441,839
Working capital (deficit) ................ (3,541,257) (2,145,611)
Shareholders' Equity (deficit) ........... $ (2,280,945) $ (2,061,872)
Statement of Operations For The Year Ended December 31,
1999 1998
------------------ ---------------------
Hardware revenues ........................ $ 2,850 $ 2,853,969
Software revenues ........................ 260,703 72,486
Total revenues ........................... $ 263,553 $ 2,926,455
Operating loss ........................... (2,642,989) (2,588,762)
Loss before extraordinary items .......... (2,882,322) (3,130,621)
Net loss ................................. (2,391,948) (2,530,909)
Net loss per common share ................ $ (0.28) $ (0.58)
Number of shares used in computing
per share data ........................... 8,486,443 4,324,292
</TABLE>
18
<PAGE>
Summary:
Fiscal Year 1999 was a pivotal year of transition - the Company focused
its efforts and resources on several key areas which management considers
crucial with respect to the strategic positioning of Magnitude for future
growth: (i) the further expansion and completion of its core software product,
the ErgoManager(TM) software system, (ii) the development of strategic
partnerships with several potential resellers and influencers, (iii) the
introduction of key prospective clients to the ErgoManager(TM) product, (iv) the
urgently required restructuring of the Company's balance sheet and addition of a
substantial amount of new equity capital to finance ongoing and future
development and marketing efforts, and (v) the conceptualization and initial
design of new software products related to Internet and e-Commerce usage - two
important growth markets. Management believes that it has succeeded in making
significant progress in all five areas.
The ErgoManager(TM) System:
During the year, Version 3.05 was released and Version 4.0, to be
released during the year 2000, was nearing completion. Numerous important
feature enhancements and a new report writer module were finalized. The system
as a whole has been extensively field tested during several dozen pilot programs
at prospective customers' sites, and several customers have substantially
expanded their usage of the software.
Key Prospective Clients:
At this time the Company focuses on introducing its ergonomic software
products to the market. The most promising clients are medium size to large
companies or organizations that (a) employ a large staff in the data entry or
general computer related work environment, (b) are cognizant of the potential
gains in productivity associated with preventive action and sensitive to the
health risks and liability potential arising out of unattended workplace
deficiencies, and (c) are prepared to make the necessary investments in a
remedial and preventive solution such as offered by the ErgoManager(TM) System.
During the second half of 1999, the Company succeeded in gaining acceptance for
larger pilot programs, and in some cases the actual deployment of the software
across entire departments, at several large corporate clients, among them
well-known Fortune 500 companies.
Recapitalization and Debt Restructuring:
As explained in more detail below, starting with the latter part of
1999, management is making efforts to retain investor's confidence in the
Company's future with the goal of obtaining new equity capital and reducing the
Company's debt burden. These efforts are showing results in form of a
significant relative improvement of the balance sheet of the Company.
19
<PAGE>
New Products:
Several new product initiatives started in 1999 and are expected to
link the Company's future to the Internet and e-Commerce marketplace. Among
these are ErgoPal, eFuel(TM), and SmartErgonomics.com. Expected new equity
capital will fund initial development efforts, however, management plans to
attract additional funding dedicated specifically towards development and
marketing efforts in these new areas.
Results of Operations for the Year Ended December 31, 1999:
For the year ended December 31, 1999, the Company had gross revenues of
$263,553 . While modest, this figure represents a significant increase in
software-derived revenues (prior year $72,486), all of which was generated by
the Company's wholly owned subsidiary Magnitude, Inc. These revenues are
primarily composed of smaller orders for initial pilot projects. Conversion to
enterprise-wide contracts is expected for several of these pilots. The sales
cycle for larger projects involving software related products is relatively
long, and the Company does not expect to realize significant new revenues before
the second quarter of fiscal year 2000.
Gross profits amounted to $92,732 for a 35% gross margin. Gross profits
are burdened with a fixed charge for amortization of software investments.
Software assets underlying the Company's products are being amortized on a
straight line over 10 years, resulting in a level charge of approximately
$12,000 per month to cost-of-goods-sold. Owing to the fact that variable
cost-of-goods-sold expenses are in the vicinity of only 5%, the gross margin
will sharply increase when revenues grow. After deducting selling expenses and
general and administrative expenses of $2,735,721 the Company realized an
operating loss of $2,642,989 (compared to an operating loss of $2,588,762 in
1998). Non-operating expenses totaled $239,333 and include $293,553 net interest
expense and non-operating income of approximately $133,520 for royalties from
the 1998 sale of the Company's hardware product line. A large extraordinary gain
of $490,374 from the sale of net loss carry-forward tax credits pursuant to the
new New Jersey Emerging Technology and Biotechnology Financial Assistance Act
more than offset the interest expense, and the year concluded with a net loss of
$2,391,948 or $0.28 per share, compared to a loss of $2,530,909 or $0.58 per
share ($3,130,621 or $0.72 per share before an extraordinary gain from the sale
of the Company's hardware product line) for the previous year.
The fiscal year's results must be interpreted from the viewpoint of a
young company that pioneers new products for emerging markets. These markets are
now evolving and management believes that its "First to Market" approach will
lead to a strong competitive advantage and a sizable market share during the
months and years to come.
To some extent, a severe capital shortage during the first nine months
of the fiscal year affected the extent and pace at which the new software
products could be introduced to the market. The working capital shortage in
particular prohibited a more comprehensive marketing campaign which would have
accelerated the education of potential clients. Education is of critical
importance. This task will become easier for the Company as the general public
becomes aware of the risks associated with poor posture and work habits in the
computer work-place environment, and as the burden of informing the public is
taken up by certain State and Federal agencies. In addition, as described below,
the Company during the first quarter in 2000 has secured new capital investments
that will provide for the funding of a comprehensive marketing plan.
20
<PAGE>
Liquidity and Capital Resources:
At December 31, 1999, the working capital deficit amounted to
$3,541,257 as compared to a deficit of $2,227,516 at December 31, 1998. Current
liabilities included approximately $3.7 Million short-term debt, the majority
maturing during the second and third quarter of 2000. During the year and as a
consequence of the absence of revenues, operations consumed $1,955,000 cash
flow, financed primarily by the issuance of convertible debt with maturities
averaging 14 months, and short-term loans, and to the extent of $525,000 by
direct equity investments, all of these under private placement arrangements
with accredited investors. The Company has no bank debt.
Beginning in the fourth quarter of 1999, management has taken
accelerated measures to redress the balance sheet and put the Company on a more
solid financial footing. At the end of the year, negotiations are underway with
several interested parties which when completed will result in new net equity
investments in the form of cash under private placement arrangements totaling
more than $2.5 Million. Parallel to attracting new capital in the form of equity
investments, the Company seeks to convert significant amounts of short-term
convertible debt maturing during 2000 into equity or long-term debt.
Fiscal Year Ended December 31, 1998, Compared to Fiscal Year Ended December 31,
1997
The selected financial information presented below under the captions
"Statement of Operations" and "Balance Sheet" for the years ended December 31,
1998 and 1997 is derived from the audited financial statements of the Company
and should be read in conjunction with the financial statements and notes
thereto.
On July 2, 1997, the Company, then known as Whitestone Industries Inc.,
after divesting itself of substantially all operations, assets, and liabilities,
extended an offer to all holders of the common stock of Magnitude, Inc. f/k/a
Proformix, Inc. to exchange their shares into newly to be issued common stock of
the Company. The business combination which took the form of a reverse
acquisition has been accounted for as a Purchase. Subsequent to the exchange,
the Company and Magnitude, Inc. remain as two separate legal entities whereby
Magnitude, Inc. operates as a subsidiary of Magnitude Information Systems, Inc.,
however, the operations of the newly combined entity are comprised solely of the
operations of Magnitude, Inc. Therefore, the discussion ensuing below only
pertains to the operations of Magnitude, Inc. for the prior fiscal year until
the date of the acquisition of Magnitude, Inc. through the Company, and to the
operations of the Company thereafter. The past results of operations for
Whitestone Industries, Inc. are summarized as Discontinued Operations. All
intercompany accounts and transactions have been eliminated in consolidation.
21
<PAGE>
Selected Financial Data
<TABLE>
<CAPTION>
Balance Sheet December 31,
1998 1997
----------------- --------------------
<S> <C> <C>
Total assets ........................... $ 2,138,453 $ 1,152,250
Current liabilities .................... 2,813,308 3,429,825
Long-term debt ......................... 1,316,839 1,719,435
Working capital (deficit) .............. (2,227,516) (2,806,682)
Shareholders' Equity (deficit) ......... $ (1,991,694) $ (3,997,010)
Statement of Operations For The Year Ended December 31,
1998 1997
------------------ --------------------
Hardware revenues ...................... $ 2,853,969 $ 3,125,009
Software revenues ...................... 72,486 -
Total revenues ......................... $ 2,926,455 $ 3,125,009
Operating loss ......................... (2,588,762) (1,128,170)
Loss before extraordinary items ........ (3,113,157) (1,507,745)
Net loss ............................... (2,530,909) (1,507,745)
Net loss per common share .............. $ (0.58) $ (0.76)
Number of shares used in computing
per share data ......................... 4,324,292 2,094,724
</TABLE>
Results of Operations for the Year Ended December 31, 1998:
For the year ended December 31, 1998, the Company had gross revenues of
$2,926,455 (previous year $3,125,009), all of which was generated by its
subsidiary Magnitude, Inc., primarily through its keyboarding systems business.
A portion of $72,486 during 1998 was attributable to the licensing of the
Company's proprietary software. There were no software revenues in 1997.
Gross profits amounted to $1,336,015 for a 46% gross margin ($1,673,805
respectively 54% in 1997). After deducting selling expenses of $1,363,564 and
general and administrative expenses of $2,561,213, the Company realized an
operating loss of $2,588,762 (compared to an operating loss of $1,128,170 in
1997). Non-operating expenses aside from an item of $686,584 extraordinary
income from the sale of the hardware business to Office Specialty and related
royalty income (see Item 1 "Business") totaled $628,731 and include $342,010 net
interest expense and charges of approximately $255,000 which account for the
write-off of assets which were obsoleted with the sale of the hardware business
and for the dissolution of previously capitalized deferred financing charges,
the latter as the result of the early repayment of bank loans in connection with
the Office Specialty transaction. The year concluded with a net loss of
$2,530,909 or $0.58 per share, compared to a loss of $1,507,745 or $0.76 per
share for the previous year.
The fiscal year's results were primarily determined by a combination of
slightly lower revenues, a decrease in the overall gross profit margin, and
significant increases in general and administrative expenses. Sales of keyboard
platforms and accessories continued at a strong pace throughout the first two
22
<PAGE>
quarters, however, were affected during the third quarter by a worsening
shortage of working capital which brought about disruptions in the supply of
materials and caused a curtailment of marketing activities. During the fourth
quarter and in anticipation of the impending sale of the hardware product line,
management dedicated most of the available resources towards the software
business. Effective with the sale of the hardware business in November 1998 no
further revenues were being generated from this product line, aside from
royalties which amounted to $53,543 for the months of November and December and
which are included in Non-operating Income. In the aftermath of the Office
Specialty transaction, the Company's revenue base is being supplied solely by
the licensing of the Company's proprietary software. The software business
accounted for only $72,486 during 1998, however, is expected to grow
significantly during 1999.
Cost-of-goods sold include approximately $95,000 amortization of
software assets. These assets which the Company acquired earlier in 1998
pursuant to the asset purchase agreements with Rolina Corporation and Vanity
Software Publishing Inc. and which formed the basis for the further development,
during the year, of the Company's proprietary Proformix EMS Software System, are
being amortized on a straight line, 10-year, basis. Such software amortization
and higher agency fees in connection with some hardware sales accounted for the
decrease in the overall gross profit margin which otherwise would have tracked
the prior year's result.
During the year, the Company invested considerable resources in the
further development and enhancement of its acquired software products, and the
formation of new infrastructure for the new business sector. The Company hired
product development and customer support staff and, starting with the fall of
1998, put in place a new sales organization dedicated to the software business.
Related incremental expenditures, not including the outlays for the primary
software assets acquired from Rolina and Vanity Software, totaled more than
$800,000 , most of which are reflected in the financial statements as additional
operating expenses. These expenditures which management categorizes as a
front-end investment in the future of the Company, caused general and
administrative expenses in total to increase by 63% over the level of the
preceding year. However, the Company is in the process of divesting itself of
unneeded infrastructure previously associated with the hardware business, and a
cost savings trend is expected to take hold during the upcoming fiscal year.
The Software Business:
In expectation that - on a going forward basis - the software business
will account for most if not all of future revenues, management is giving
special attention to the fact that this business distinguishes itself from the
Company's traditional hardware business in certain important criteria:
(a) Target Clientele: even more so than with the keyboarding products, the
Company expects its client mix to gravitate towards larger companies and
organizations. A likely consequence, initially, will be a concentration of sales
into a smaller number of larger projects and increased volatility in its revenue
stream.
(b) Sales Cycles: Software that has the potential of affecting a
company's operations especially with respect to utilization of human resources
is subjected to a possibly larger degree of test, scrutiny, and committee
decision making than most other software products. Management therefore expects
23
<PAGE>
longer sales cycles which during the transition period until a break-even sales
volume is achieved, will put additional strain on the Company's liquidity and
financial resources. (c) Cost Structures: The software business to a significant
degree is less capital intensive than the Company's traditional hardware
business. Also, its overall cost structure is less sensitive to changes in
volume. While this translates into improved predictability of future
expenditures, it also burdens the Company with a certain level of quasi fixed
expenses during the period when it is only beginning to realize cash flow from
revenues. However, after passing the break-even point the Company will be the
beneficiary of significant cash flows from any further revenue increases.
In view of the above and of its limited financial resources the
Company, at least during the upcoming quarters, will need to continue relying on
outside financing to augment working capital until a sufficiently large revenue
base has evolved. Management is working to secure such financing and fully
expects to be able to successfully complete the transition to a specialized
software house, with the goal of becoming the premier supplier of productivity
enhancement software for the computer workplace, concentrating on areas such as
worksite evaluation, employee training and work pacing.
Liquidity and Capital Resources:
At December 31, 1998, the working capital deficit amounted to
$2,227,516 as compared with a deficit of $2,806,682 at December 31, 1997. The
relative increase in working capital was a direct consequence of financing
activities and other transactions more closely described below, which more than
offset the total of investments in the new software business and the losses
incurred .
Such activities fall into four areas: (1) the divestiture of the
hardware business pursuant to the Asset Purchase Agreement with 1320236 Ontario
Inc. in November 1998 (see Item 1 "Business") which generated approximately $1.3
million cash for the Company; (2) the conversion of certain current and past-due
Company debt totaling approximately $340,000 into common equity at the rate of
$1 per share; (3) the raising of new capital through placement of the Company's
Common Shares with domestic investors under private placement arrangements, and
with foreign investors under exemptions pursuant to Regulation S promulgated
under the Securities Act of 1933, as amended, by way of which the Company
received an aggregate $2,787,000 net in new equity capital against issuance of a
total of 1,525,866 shares, consisting of $2,512,000 cash and $275,000
representing the conversion of subscription prepayments received prior to
December 31, 1997; and (4) loans extended by a director and shareholder of the
Company (see Item 12 "Certain Relationships").
Cash received from the 1320236 Ontario Inc. transaction was used to
retire outstanding bank debt in the amount of approximately $800,000 owed to the
Company's principal lender Carnegie Bank, who held a security interest in the
sold assets, and to pay down certain trade liabilities in the aggregate amount
of approximately $500,000. Cash received from the financing transactions
mentioned under (3) and (4) above was primarily used to partially finance the
software purchases pursuant to the Rolina Corporation and Vanity Software
Publishing Co. acquisitions, and to offset losses from operations. The equity
issues as per (3) took place during the first and second quarter of 1998 and
have been discussed in more detail in the Company's last report on Form 10-KSB
and the quarterly 10-QSB reports filed during 1998, all of which are
incorporated herein by reference.
24
<PAGE>
The Company currently has only very limited financial resources, and
needs to augment working capital through outside financing. Management's efforts
in this direction center around securing additional funding from a variety of
sources including debt instruments and a liquidation of unused NOL's for which
recent New Jersey tax legislation created a market. Until such can be completed
which is expected to occur towards the beginning of the second quarter, certain
members of the Company's management have agreed to provide for needed bridge
funding.
BUSINESS
Background
Magnitude Information Systems, Inc. (the "Company") was incorporated as
a Delaware corporation on April 19, 1988 under the name Fortunistics Inc. On
March 4, 1993, the Company changed its name to Whitestone Industries, Inc. On
July 14, 1997, the Company changed its name to Proformix Systems, Inc., and on
November 18, 1998, the Company changed its name to Magnitude Information
Systems, Inc.
On June 24, 1997, the Company, extended a stock exchange offer
to the shareholders of Proformix, Inc., a Delaware corporation and
manufacturer of ergonomic keyboarding systems. Proformix, Inc. in November
1998 changed its name to Magnitude, Inc. and is now referred to as Magnitude,
Inc.. At the time of this submission, holders of 98.5% of Magnitude, Inc.
common stock have tendered their shares. The business combination which took
the form of a reverse acquisition has been accounted for as a purchase.
As a result, the Company and Magnitude, Inc. remain as two separate legal
entities whereby Magnitude, Inc. operates as a subsidiary of Magnitude
Information Systems, Inc.. The operations of the newly combined entity are
currently comprised solely of the operations of Magnitude, Inc.
On February 2, 1998, the Company entered into an Agreement and Plan of
Merger with Rolina Corporation, a privately held New Jersey software developing
firm, and on April 30, 1998, into an Asset Purchase Agreement with Vanity
Software Publishing Co., a Canadian developer of specialized software, whereby
the Company, in return for payments in form of cash and equity, acquired the
rights to certain software products and related assets, with such software
products subsequently forming the basis for the further development, during the
year, of the Company's proprietary ErgoManager(TM) software system.
On November 18, 1998, the Company and its wholly owned subsidiary
Magnitude, Inc. entered into an Asset Purchase Agreement and several related
agreements with 1320236 Ontario Inc. ("OS"), a publicly traded Canadian
designer, manufacturer and distributor of office furniture based in Holland
Landing, Ontario, Canada, pursuant to which OS acquired Magnitude, Inc.'s
hardware product line comprised of the Company's ergonomic keyboard platform
products and accessories, all related inventory and production tooling and
warehousing assets, and all intellectual property rights including the Proformix
name, against a cash consideration and an ongoing contingent stream of royalty
payments on OS' sales of the Proformix hardware products.
25
<PAGE>
The Company is currently subject to the reporting requirements of
Section 15(d) of the Securities Exchange Act of 1934. The Company has the
authority to issue an aggregate of One Hundred Million (100,000,000) Common
Shares, par value $.0001, and Three Million (3,000,000) Preferred Shares, par
value $.01, of which at December 31, 1999, Two Thousand Five Hundred (2,500)
were designated as Cumulative Preferred Shares, par value $.001 . On January 31,
2000, the Company filed amendments to its Certificate of Incorporation,
designating from its "blank check" preferred stock pool 200,000 shares as Series
A Senior Convertible Preferred Stock, par value $0.001; 350,000 shares as Series
B Senior Convertible Preferred Stock, par value $0.001; and 120,000 shares as
Series C Senior Convertible Preferred Stock, par value $0.001.
As of June 30, 2000, there were outstanding 15,479,163 Common Shares, 1
Cumulative Preferred Share, 29,300 shares of Series A Stock, 222,228 shares of
Series B Stock and 100,000 shares of Series C Stock.
Narrative Description of Business
Until November 18, 1998, when the Company sold its hardware product line
comprised of Magnitude, Inc.'s ergonomic keyboard platform products and
accessories, its business was primarily centered around the design, manufacture,
and marketing of accessory products for the computerized workplace. In parallel,
and beginning with the February 1998 acquisition by the Company of Rolina
Corporation, an early stage software business which had developed an ergonomic
software product that was being marketed under the name "ErgoSentry", and the
subsequent acquisition in May 1998 of substantially all of the assets of Vanity
Software Publishing Corporation, a Canadian software firm, which also included a
certain ergonomic software package known as "ErgoBreak", the Company engaged in
the development of a unique suite of software packages designed to increase
productivity and prevent repetitive stress injury in the computer-related work
environment which include the before mentioned "ErgoSentry" and "ErgoBreak"
products. These efforts resulted, in November 1998, in the completion of the
initial release of the proprietary ErgoManager(TM) software system. The
Company's business is now focused exclusively on the further development and
promotion of these and other software products. The Company has applied for
several patents for its products, and has recently received a Notice of
Allowance from the U.S. Patent and Trademark Office on its application relative
to certain core inventions within its ErgoManager(TM) system. The Company has
not yet realized material revenues from licensing its software. With new
products targeted at relatively new markets the Company currently must be
considered an enterprise in transition.
As the utilization of computers in the office has increased
significantly in the last decade, so has the rate of health problems believed to
be related to the use of computers. Computer ergonomics focuses on optimizing
the design of technology involved in the utilization of computers in the office,
and also attempts to affect the manner in which people interact with computers,
so as to minimize the associated health risks. A successful technology delivery
system positively impacts the cost of doing business by improving the comfort,
productivity, job satisfaction and safety of the computer user, while reducing
the costs of absenteeism and work related disability.
26
<PAGE>
Repetitive stress injury or "RSI" is a classification of diseases caused
by the excessive use of joints. It is a sub-classification of Cumulative Trauma
Disorders or "CTDs". One common form of RSI is Carpal Tunnel Syndrome or "CTS"
which can be caused by excessive typing, among other activities, and can be
aggravated by deficient - in the ergonomic sense - equipment and inappropriate
work habits. The carpal tunnel is a channel in the wrist where tendons and the
median nerve connect the arm to the hand. Through excessive use, the tendons
become swollen and pinch the nerve. RSI accounts for a large portion of
work-related illnesses, and the incidence of RSI is expected to grow as the
number of people operating keyboards increases. The impact of RSI is
measured not only in the pain and suffering of its victims, but also in time
lost from work and medical costs.
The Company's proprietary software products are designed to help
businesses deal with potentially preventable repetitive stress injuries, by
real-time monitoring of keyboarding activities, pro-active dialog with at-risk
employees, and strategic profiling and management of computer use throughout an
organization.
During 1996, the issues of repetitive stress injuries and the potential
of liability to employers from the effects of carpal tunnel syndrome and other
RSI's on employees were forcibly brought to the forefront of corporate
consciousness through widely publicized suits involving a major computer maker.
The US Bureau of Labor Statistics reported that already in 1995, there were
approximately 70,000 cases of carpal tunnel syndrome and associated tendonitis,
and that 25% of all injuries that result in lost work time are due to repetitive
stress problems. They currently cost employers an estimated $20 billion a year
in workers' compensation claims. The federal government estimates an additional
$80 billion is lost in related costs such as absenteeism and reduced
productivity. Increased awareness of the health risks and associated costs led
the State of California to pass OSHA Title 8 which directs qualifying employers
to establish and implement a program designed to minimize RSI's. Such program
shall include work-site evaluation, control of exposures which have caused
RSI's, and training of employees. The Company's proprietary software products
deliver a comprehensive compliance tool. In a similar pursuit, the Clinton
Administration, in January 2000, proposed that on a federal level, preventive
guidelines be established, and the Occupational Safety and Health Administration
plans to issue pertinent regulations this year. The RSI issues in the United
States are mirrored in the rest of the developed world. The Company believes
that the growing recognition of these trends will give rise to a rapidly
expanding market for the Company's products.
The Industry
The Company operates in only one business segment: the development,
marketing, and licensing of risk aversion and productivity enhancement software
products for the computerized workplace environment. More specifically, the
Company licenses highly sophisticated and proprietary software that provides
computer based training, work pacing and monitoring tools, as well as a computer
workstation assessment tool.
Potential customers for the Company's products are businesses of all
sizes, as well as organizations and government departments and agencies that
employ many staff in computer-related functions. The software industry in
general is comprised of a remarkable variety of providers, ranging from small
boutique-type designers to large international corporations. The industry is
characterized by great dynamics, patterns of rapid growth and well-known success
stories, but also by a high degree of volatility and risk. As such, the Company
with its recent transition from the more stable environment of a supplier of
ergonomic (hardware) accessories, to a software house addressing a specialized
market, has entered new territory. Nevertheless, its chances for success, in
management's opinion, are greatly enhanced by the timeliness of the introduction
of its product into an increasingly receptive market, as described above.
27
<PAGE>
The Company operates primarily in the United States of America,
however, has introduced a Portuguese language version of its software products
for the Brazilian market, and is preparing other language versions. The Company
has not yet derived any material revenues from the licensing or sale of its
software products, either domestically or in foreign markets.
Products, Patents, Trademarks
The Company's current primary product is a suite of seven proprietary
software modules marketed under the name ErgoManager(TM) which are designed to
help individual computer users and businesses deal with potentially preventable
repetitive stress injury (RSI). The seven software modules can be applied
individually or together in a comprehensive ergonomic and early intervention
program that seeks to modify a user's behavior by monitoring computer usage
patterns over time and warning the user when to break a dangerous trend in
repetitive usage of an input device, such as a keyboard or mouse. The product
was developed to train people working on computers, monitor computer-use related
activities and evaluate a user's risk exposure and propensity towards injury or
loss of effectiveness in connection with his/her day-to-day work. Moreover, the
package enables a company to not only address the issue of health risks
involving employees and to minimize resulting potential liabilities, but
delivers a powerful tool to increase overall productivity.
The system is highly customizable for management, staff and employees.
All components operate on any PC or workstation running the Microsoft Windows
operating system. The ErgoManager(TM) suite employs the International RULA
(Rapid Upper Limb Assessment) standard for compliance with California OSHA Title
8. The seven modules are described as follows:
ErgoSure : A postural risk-assessment tool that records how an employee is
working; it determines injury potential and suggests improvements. It also can
be used to evaluate workstation alternatives prior to purchase.
ErgoSentry(TM) : Employing patent-pending algorithms that measure rest against
work in real time, the non intrusive program informs users when to break from
high-risk trends (thresholds definable by the user or corporate safety officer)
when keyboarding or using a mouse. ErgoSentry also includes an "ErgoPak" video
or slides that depict correct workstation setup, posture and repetitive
stress-reducing exercises. Surveyor(TM) : An electronic surveyor used by
management to gather macro-information about employee populations and to gain a
clear understanding of equipment usage, discomfort and comfort patterns,
workstation configurations and employee habits.
UserNotes(TM) : An easy, effective means for employees to report workplace
discomfort so staff can address certain issues earlier, at lower cost and with
greater likelihood of success. UserNotes encourages a proactive approach.
28
<PAGE>
Guardian : Captures the frequency of mouse clicks and activation of individual
keys, over time. It also can be used in a review process to assess attributes
such as ease-of-use among competing applications. Guardian also is a good
training tool. By measuring before-and-after results, Guardian can be used to
determine the type of training program needed, measure each program's
effectiveness and highlight needed improvements.
ErgoQuiz: An electronic testing system and awareness-building tool that measures
employees' understanding of ergonomic principles.
ErgoManager(TM) Analyzer: A comprehensive report writer and analysis tool for
manipulating, interpreting and evaluating the data collected in the ErgoSentry
module - on the workstation-, department-, and company level.
In addition to the trademarks shown above which are owned by the
Company, Magnitude has applied for other product designators to be afforded
trademark protection, and has filed US Patent Application for certain design
principles underlying several of its proprietary software products, including a
patent application for its newest product, a new class of usage tracking and
data collection software that is directed towards e-commerce and a wide range of
other Internet related applications. There can be no assurance, however, that
such patents will be granted or, if granted, that a third party will not design
products which perform the same or similar functions as the Company's products,
using technology other than that covered by the Company's patents.
Patents and New Products
ErgoSentry - Patent Allowed:
A patent was issued to the Company on May 16, 2000 by the United States
Patent and Trademark Office. The patent covers various innovations including a
proven approach that helps computer users manage their activity to improve
productivity and reduce the risk of repetitive motion injuries
ErgoPal Introduced, Patent Pending:
New patent-pending ErgoPal software -- a work pacing tool that helps
users mitigate health risks and improve their productivity by gently alerting
them to increases in stress and fatigue which are occurring before they realize
it.
eFuel Announced, Patent Pending:
New patent-pending technology powering consumable software, web-sites
and deliverable content. eFuel can be used as an e-Commerce currency provided in
exchange for user information on their computer usage both online and offline.
Users build up rewards to apply towards product and service purchases.
29
<PAGE>
Business Strategy
The most important prospective customers for the Company's products are
medium and large companies, organizations, and governmental departments and
agencies that have a relatively large staff working in computer-related
functions. These entities not only are more cognizant of the health risks and
negative effect on productivity associated with many of the traditional tools of
the computerized workplace and therefore tend to be more receptive to new
remedial solutions and alternatives based on the science of Ergonomics, but also
have a significant exposure in terms of legal liabilities if they fail to act
addressing these potential risks. On an on-going basis, the increasing costs of
Work Comp insurance creates a growing incentive to deal with the underlying
causes.
With its new proprietary ergonomic software the Company offers a
comprehensive and effective tool for corporate clients to address the three
major issues involved: (a) employee wellness, (b) cost containment and
productivity enhancement, and (c) potential legal liabilities. While certain
portions of the ErgoManager(TM) software suite have been previously marketed as
individual modules, the release to the market, in November 1998, of an overall
integrated solution in form of the ErgoManager(TM) system constituted a novel
approach.
Since that time, the product has been installed by a rapidly growing
number of corporate and institutional clients. Typically, in view of the
new-ness of product and market, such client initially purchases a license for a
"pilot version" of the software, functionally complete but limited to a smaller
number of users. After undergoing a process of familiarization and evaluation
the client is expected to upgrade to the intended ultimate number of users
which, by definition, should encompass all personnel exposed to the above
described risks. Many tests and evaluations by third parties have confirmed to
the Company's satisfaction that its product is mature, stable, and effective. It
is with a high degree of confidence, therefore, that the Company expects many of
the ongoing trial installations to lead to larger enterprise orders and,
thereby, to the targeted revenue stream. The key to economic success therefore
lies in a comprehensive marketing approach that carries the Company's message to
the largest possible number of prospective clients. Since its own financial
resources are limited, the Company embarked on a strategy to seek marketing
partnerships with entities and individuals in the risk management industry. An
important milestone was reached when the Company, in the fall of 1998 entered
into a joint venture agreement with AON Ergonomic Services, a division of AON,
one of the largest insurance services companies in the world, to market the
ErgoManager(TM) system. This agreement was renewed and expanded in July 1999. In
January 2000, Anderson Consulting LLP and the Company entered into an agreement
whereby Anderson will include the Company's products in their prestigious "Ideas
Exchange" showcase. This agreement is of special significance because it will
introduce the Company to a potentially large audience of key corporate clients.
During the second quarter, 2000, the Company entered into joint marketing and
distribution agreements with Automated Systems, Inc.. ("ASI"), a well-known,
high-level systems integrator based in Chicago, and Protegrity Services, Inc.,
one of the largest, privately held workers' compensation companies in the United
States, serving approximately 18,000 business customers in 17 States.
30
<PAGE>
The Company intends to continue developing strategic marketing
relationships with leading business consultants, to broaden its distribution
channels to include tiered marketing arrangements, and to strengthen its direct
sales force and support organization, thereby focusing on a marketing approach
which emphasizes the advantages that accrue to a business from the unique
combination of risk management and productivity enhancement tools provided by
ErgoManager(TM).
Research and Development
Since early 1998 the Company has invested considerable resources in the
further development of the overall ErgoManager(TM) system and the integration of
certain software assets acquired pursuant to the agreements with Rolina
Corporation and Vanity Software Publishing Corporation (see "Narrative
Description of Business"), and in further enhancements to the products. Also
during this time, a complete set of new and necessary documentation and
marketing collateral was created. In late summer, the first official version of
ErgoManager(TM), Version 1.78, was released, followed in October 1998 by Version
2.12., and in April 1999 by Version 3.05.
The Company has scheduled Version 4.0 for release later this year.
The Company has expensed all expenditures related to the above efforts.
Such expenses totaled $162,600 for the year ended December 31, 1999, and
$130,460 for the year ended December 31, 1998.
Competition
The market addressed by the Company's software products is presently
served by a number of smaller software companies, none of which occupies a
dominant position. These competitors, however, typically only target task
complexes that are addressed by individual component parts of the Company's
products, such as the ErgoSentry(TM) module, without offering a comparable
breadth of function and integration in such areas as work-site evaluation,
employee training and work pacing.
The Company is not aware of any products that directly compete with its
integrated software product suite that is marketed by the Company under the
trade name ErgoManager(TM). While the Company believes that it currently has a
strategic competitive advantage in ergonomic software, especially with regard to
its patent-pending algorithms, there can be no assurance that competitors will
not attempt to copy the Company's products or develop and successfully license
similar products, to the Company's detriment.
Seasonality and Dependency
The industry segment in which the Company does business is not
seasonal. The Company's software related revenues until now have consisted
primarily of smaller orders for pilot projects and field tests. The Company's
future success is dependent upon its ability to follow up on such initial orders
with enterprise-wide contracts where corporate clients introduce the Company's
software products across the entire spectrum of computer workplaces throughout
their company or certain divisions. There can be no assurance that the Company
will succeed in doing so, or if it does succeed, that its business will generate
enough revenues during the coming periods, in a timely manner and sufficient in
scope, to finance and support the Company's planned future growth as expected by
management.
31
<PAGE>
License Agreements
On December 1, 1997, the Company entered into a two year Software
Distribution and Option Agreement with Cornell Ergonomics Inc., a Delaware
corporation, pursuant to which it is licensed on an exclusive basis, to
distribute and sub-license a certain software product known as "ErgoSure" which
the Company currently markets in conjunction with its own proprietary software
products. On January 15, 2000, the Company acquired full title and
ownership to that product.
32
<PAGE>
Management
Directors, Executive Officers, And Significant Employees
The names and ages of all directors and executive officers of the Company are as
follows:
Name Positions Term Served (Expires)
---------------- -------------- ----------------------
Steven D. Rudnik Director (Chairman Jan. 8, 1999 (2001)
of the Board)
President, Chief Executive Feb. 2, 1998 (March 2, 2003)
Officer
Joerg H. Klaube Vice President, Secretary, July 31, 1997 (April 15, 2002)
Chief Financial Officer
John C. Duncan Director May 17, 1999 (2001)
Executive Vice President July 1, 1999 (July 1, 2004)
Steven L. Gray Director May 18, 2000 (2001)
Ivano Angelastri Director May 18, 2000 (2001)
Joseph J. Tomasek Director Dec. 23, 1999 (2001)
There are no family relationships among the Company's Officers and
Directors.
All Directors of the Company hold office until the next annual meeting
of the shareholders and until successors have been elected and qualified.
Executive Officers of the Company are appointed by the Board of Directors at
meetings of the Company 's Directors and hold office until they resign or are
removed from office.
Resumes:
Steven D. Rudnik, age 40 - President,Chief Executive Officer, and
Director. Mr. Rudnik joined the Company in February 1998 with the acquisition of
Rolina Corporation, co-founded by Mr. Rudnik in 1996 and at that time, was
appointed President and CEO of Proformix Software. Mr. Rudnik was appointed
President and Chief Executive Officer, and elected to the Board of the Company,
in January 1999. Mr. Rudnik has extensive experience in software product
development and an operational background in software companies extending over
the past 20 years. In 1983, Mr.Rudnik joined Randall-Helms International, Inc.
Over the next 13 years, he conceived and developed four independent families of
stock market modeling software products aimed at the worldwide Institutional
Investor market. Over this time, these product families generated over $25
million in sales, to more than 400 clients in 23 countries. Mr. Rudnik was
Executive VP Development and Partner at the time Randall-Helms was sold in 1995.
33
<PAGE>
Joerg H. Klaube, age 58 - Chief Financial Officer. Joined Magnitude,
Inc. in December 1994 as Vice President Finance & Administration. From 1993 to
1994 he was Vice President Administration for Comar Technologies Inc., a
computer retail firm, and from 1983 to 1993 Chief Financial Officer for
Unitronix Corporation, a publicly traded software design and computer marketing
firm. Prior to that, Mr.Klaube was employed for 16 years with Siemens Corp., the
US subsidiary of Siemens AG, where he served most recently as Director of
Business Administration for its Telecommunications Division. He graduated from
the Banking School in Berlin, Germany, and holds an MBA degree from Rutgers
University.
John C. Duncan, age 42 - Executive Vice President. Until January 1999,
Mr. Duncan was the Director of the Department of Industrial Relations (DIR) of
the State of California. In that capacity, he was the principal advisor to
Governor Pete Wilson on labor and employment issues and served in his cabinet.
Mr. Duncan was instrumental in California becoming the first state to enact
ergonomic regulations to help protect workers from repetitive stress injuries.
As Director of the California DIR, Mr. Duncan supervised the Cal/OSHA program
and eleven other divisions of the State government, including the Labor
Commissioner's Office and the Division of Workers Compensation. He was
responsible for the supervision of 3,000 State employees and an annual budget of
$220 Million.
Steven L. Gray, age 51 years, is a resident of Venice, Florida. For the
past 3-1/2 years, Mr. Gray has served as the President and is a shareholder of a
private Florida corporation engaged in the retail distribution of nutritional
products. This corporation has a customer base in nine countries. Prior to that
time, Mr. Gray ran his own real estate development company, specializing in the
design and construction of multi-family housing.
Ivano Angelastri, age 37 years, is a resident of Zurich, Switzerland.
Mr. Angelastri has served as Managing Director of T&T Capital Trading, a
securities brokerage firm located in Zug, Switzerland, since January, 1999,
offering to select and institutional clients financial advisory and portfolio
management services. Prior to his current position, Mr. Angelastri served as
Managing Director of Megan Services where he also performed financial advisory
and portfolio management services.
Joseph J. Tomasek, age 53 - Director. Mr. Tomasek was appointed
a director in February 2000. He has been engaged in the private practice of
corporate and securities law in his own law firm for the last ten years.
Mr. Tomasek was appointed to serve as general counsel for the Company in
1999. In addition to his work with the Company, Mr. Tomasek represents
several other clients in the United States and Europe in corporate finance
matters.
34
<PAGE>
Executive Compensation
The following table summarizes the cash compensation paid or accrued
and executive capacities during the past three fiscal years for the Company's
Chief Executive Officer and for each executive officer whose aggregate cash
remuneration exceeded $100,000.
<TABLE>
<CAPTION>
Restricted Securities
Stock Underlying
Name Year Salary (1) Awards Options (2)(3)
---- ------ ---------- ------ -------
<S> <C> <C> <C> <C>
Steven D. Rudnik 1999 $ 44,144 150,000 200,000
President and CEO 1998 $ 106,923 750,000
Joerg H. Klaube 1999 $ 100,025 0 50,000
Vice President, CFO 1998 $ 97,095 0 31,162
1997 $ 80,008 0 68,838
Michael G. Martin 1999 $ 46,382 150,000 0
Chairman, Director 1998 $ 139,527 150,000 1,285,000
President and CEO 1997 $ 108,347 60,000 0
Jerry Swon 1998 $ 0 150,000 900,000
President and CEO
Director
John C. Duncan 1999 $ 88,500 0 540,000
Executive Vice President
Director
John M. Perry 1997 $ 80,008 75,000 40,000
</TABLE>
Executive Vice President
--------------------
(1) The value of other non-cash compensation, except for the items listed under
(2) and (4), that was extended to or paid for individuals named above did
not exceed 10% of the aggregate cash compensation paid to such individual,
or to all executive officers as a group.
(2) See table for "Stock Options" below.
(3) During 1999, the Board of Directors approved a reduction in the exercise
price of options previously granted to S.Rudnik, from $5.25 per share
(95,235 shares) and $4.0385 per share (154,765 shares) to $1.00 per share.
(4) The Board of Directors of the Company awarded several stock grants as
additional compensation for services during 1999, as follows:
Beneficiary Position No. of Shares*
----------- -------- ---------------
Michael G. Martin Chairman 150,000
Steven D. Rudnik President, CEO 150,000
Jerry Swon Director 150,000
Bruce L. Deichl Director 100,000
All such shares, with the exception of the shares granted to Steven D. Rudnik,
were registered under the Securities Act on Form S-8. The shares for Mr. Rudnik
have not yet been issued. The Company has recognized a liability in its books of
$66,667 for future issuance of such shares. * the closing price for the
Company's common stock at the time of the grants was approximately $0.70 per
share.
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<PAGE>
Stock Options :
The following table sets forth stock options granted during 1999
pursuant to the Company's 1997 Stock Option Plan, to executive officers,
directors, and beneficial owners of more than 10 percent of any class of equity
securities of the Company:
---------------------------------------------------------------------------
Number of Common % of Total Options
Shares Underlying Granted to Employees Exercise Expiration
Name Options Granted in Fiscal Year Price ($/Sh.) Date
---------------------------------------------------------------------------
J. Duncan 100,000 8.7% 1.00 7/1/04
J. Klaube 50,000 4.4% 1.00 12/22/04
The following table sets forth stock options granted during 1999
outside of the Company's 1997 Stock Option Plan to executive officers,
directors, and beneficial owners of more than 10 percent of any class of equity
securities of the Company:
---------------------------------------------------------------------------
Number of Common % of Total Options
Shares Underlying Granted to Employees Exercise Expiration
Name Options Granted in Fiscal Year Price ($/Sh.) Date
----------------------------------------------------------------------------
S. Rudnik )* 200,000 17.5% 1.00 11/19/08
J. Duncan 400,000 38.4% 1.00 4/23/06
S. Kroll 40,000 n/a 1.00 5/4/06
)* does not include options for 125,000 shares issued pursuant to an
anti-dilution clause in the Agreement and Plan of Merger for the acquisition of
Rolina Corporation dated February 2, 1998.
1997 Stock Option Plan:
The Company's 1997 Stock Option Plan, as filed with Information
Statement pursuant to Section 14(c) with the Commission on July 1, 1997, and
with Registration Statement on Form S-8 with the Commission on September 8,
1997, reserved 1,000,000 Common Shares for issuance of which 894,000 Common
Shares are underlying outstanding stock option grants and 106,000 Common Shares
remain available for future stock awards.
Compensation of Directors:
The Company currently pays no outside directors' fees. Outside
directors are awarded stock options for 40,000 shares each.
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<PAGE>
Employment Agreements
In February 1998, the Company entered into an employment agreement with
Steven D. Rudnik, its current President and Chief Executive Officer, to
serve as President and Chief Executive Officer of its software business
for a period of five years and one month. On January 8, 1999, and in
the aftermath of the Company's divestiture of its hardware product
line, his position and duties were expanded to those of President and
Chief Executive Officer for the Company as a whole. Base salary under
the agreement is $120,000 per year with annual increases determined by
the Board of Directors. The agreement also calls for the grant of
certain incentive and non-statutory stock options and eligibility for
the Company's benefit programs. The Company will also provide
reimbursement of ordinary and necessary business expenses and a monthly
car allowance. The agreement provides for severance compensation to be
determined pursuant to a formula established therein to be paid to the
officer if the employment agreement is not renewed by the Company. A
non-competition/non-solicitation restriction applies for 24 months
after termination of employment
In April 1996, Magnitude, Inc. entered into an employment agreement
with Joerg Klaube, its current Vice President and Chief Financial
Officer In July 1999, and in the aftermath of the Company's merger with
Magnitude, Inc. his position and duties were expanded to those of Vice
President and Chief Financial Officer for the Company as a whole. The
agreement is for a term of three years, renewing by subsequent three
year terms and currently expiring April 14, 2002. Pursuant to the
agreement, the officer is to receive a salary of $100,000 per year
subject to annual review by the Board of Directors, and an annual bonus
as determined by the Board, as well as certain benefits. The agreement
restricts the officer from competing with Magnitude, Inc. for a period
of two years after the termination of his employment. The agreement
provides for severance compensation pursuant to a formula established
therein if the employment is not renewed upon expiration of the initial
or any renewal term thereof, his employment is terminated by Magnitude,
Inc. other than as permitted by the agreement, or if any successor to
Magnitude, Inc. after a change of control or other reorganization of
Magnitude, Inc. fails to assume the agreement.
In July 1999, the Company entered into an employment agreement with
John C. Duncan, its current Executive Vice President, to serve as
Executive Vice President for a period of five years. Base salary under
the agreement is $120,000 per year with annual increases and other
incentives and bonuses determined by the Chief Executive Officer of
the Company. The agreement also calls for the grant of a stock option
for 100,000 shares of the common stock of the Company, and further
stock options whose vesting is tied to the achievement of certain
sales goals established in the agreement, and provides for eligibility
for the Company's benefit programs. The Company will also provide
reimbursement of ordinary and necessary business expenses. The
agreement provides for severance compensation to be determined
pursuant to a formula established therein to be paid to the officer if
the employment agreement is not renewed by the Company. A
non-competition/non-solicitation restriction applies for 24 months
after termination of employment
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<PAGE>
Certain Relationships and Related Transactions
In January 2000 the former Chairman and the Company entered
into an agreement pursuant to which he resigned as a director and officer. The
agreement provided, among other things, for (i) the termination of his
employment agreement; (ii) the conversion of cumulative preferred stock with a
face value of $900,000 and a convertible promissory note in the amount of
$351,060 into (a) 900,000 shares of common stock of the Company and (b) 100,000
shares of Series C Senior Convertible Preferred Stock with a face value of
$900,000; (iii) a restrictive covenant for which the Company will pay a monthly
fee in the amount of $5,555 over a 36-months term; and (iv) certain redemption
privileges relating to the Series C Senior Convertible Preferred Stock.
In February 2000, the President and Chief Executive Officer exercised a
put option for 155,556 shares of common stock issued in connection with the 1998
acquisition by the Company of Rolina Corporation which exercise resulted in a
$374,890 current liability to the Company. On March 31, 2000, the Company and
the President agreed to convert this current liability payable into a long-term
obligation maturing March 31, 2002 which among others provides for a right to
the holder to convert such obligation into common stock of the Company.
Between July and November 1999, an individual who in January 2000
joined the Company in the capacity of Vice President for Shareholder Relations,
invested an aggregate $450,000 in the Company against issuance of convertible
promissory notes and warrants for the purchase of 900,000 common shares. In
February 2000, these promissory notes were converted into 900,000 common shares.
38
<PAGE>
Security Ownership Of Certain Beneficial Owners and Management
The following table sets forth, as of June 30, 2000, the record and
beneficial ownership of Common stock of the Company by each officer and
director, all officers and directors as a group, and each person known to the
Company to own beneficially, or of record, five percent or more of the
outstanding shares of the Company:
<TABLE>
<CAPTION>
Title Name and Address of Amount and Nature of Percent
of Class Beneficial Owner Title Beneficial Ownership (1) of Class
<S> <C> <C> <C>
Common Steven D. Rudnik, Pres., CEO, Director 2, 302,778 (2) 13.0 1%
Stock John C. Duncan, Exec. VP, Director 510,000 (3) 3.19%
Joerg H. Klaube, CFO, 100,100 (4) **
Peter J. Buscetto, (Former Director) 56,667 (5) **
Paul Chernis, (Former Director) 30,000 (3) **
Seymour Kroll, (Former Director) 394,792 (6) 2.50%
Howard G. Siegel, VP 1,035,166 (7) 6.47%
Joseph J. Tomasek, Director 50,000 (3) **
Ivano Angelastri Director 1,050,000(11) 6.51%
Steven Gray, Director 537,000(12) 3.42%
Address of all persons above: c/o the Company.
All Directors and Officers 3,774,411 21.78 %
as a Group (8 persons)
Michael G. Martin 1,750,000 (8) 10.16 %
12 Tillman Ct., Bridgewater, NJ
Schuerch Asset Management 1,578,500 (9) 9.51%
Tellstrasse 21,
St.Gallen, Switzerland
Viviana Partners, L.P. 1,260,000 (10) 7.84 %
1 Sansome Str., San Francisco, CA
Liechtensteinische 916,820 (13) 5.68%
Landesbank
Zurich, Switzerland
</TABLE>
** less than 1%
----------------------------
(1) For purposes of this table, a person or group of persons is deemed to have
"beneficial ownership" of any shares of Common Stock which such person has
the right to acquire within 60 days of March 28, 2000. For purposes of
computing the percentage of outstanding shares of Common Stock held by each
person or group of persons named above, any security which such person or
persons has or have the right to acquire within such date is deemed to be
outstanding but is not deemed to be outstanding for the purpose of
computing the percentage ownership of any other person. Except as indicated
in the footnote to this table and pursuant to applicable community property
laws, the Company believes based on information supplied by such persons,
that the persons named in this table have sole voting and investment power
with respect to all shares of Common Stock which they beneficially own.
(2) Includes deferred compensation of 150,000 shares, options to acquire
1,325,000 shares and conversion rights for appr.750,000 shares..
(3) Represents options to acquire the same number of shares.
(4) Includes options to acquire 100,000 shares.
(5) Includes 22,222 shares held by an affiliate and options to acquire 20,000
shares.
(6) Includes options to acquire 129,866 shares and conversion rights for
approx. 194,926 shares.
(7) Includes warrants for 424,000 shares and 104,166
shares issuable for past services..
(8) Includes options for 750,000 shares and
preferred stock convertible into 1,000,000 shares.
(9) Includes options and warrants for 1,023,900 shares.
(10)Includes warrants for 600,000 shares.
(11)Includes stock options to acquire 250,000 and warrants to purchase 400,000.
(12)Includes warrants to purchase 240,000 Common Shares.
(13)Includes 277,880 shares underlying convertible preferred stock and 388,940
underlying warrants.
39
<PAGE>
Employees
As of June 30, 2000, the Company employed 18 persons, of whom six were
primarily engaged in research and development and software support activities,
seven were primarily engaged in sales and marketing, and five in general
administrative and clerical functions. The Company has no collective bargaining
agreements with its employees.
Properties
On March 15, 2000, the Company entered a five year lease for
approximately 6,000 square feet of office space at 401 State Route 24, Chester,
New Jersey, and relocated its operations during April, 2000. This lease
agreement calls for monthly rental payments of $6,500 with nominal increases
after years No. 2, 3, and 4.
40
<PAGE>
Selling Stockholder
The following table sets forth certain information regarding the
beneficial ownership of shares of common stock by Torneaux Fund Ltd.
("Torneaux"), the selling stockholder, as of September 30, 2000, and the number
of shares of common stock covered by this prospectus. The number of shares in
the table represents an estimate of the number of shares of common stock to be
offered by Torneaux, including shares that may be acquired upon the exercise of
warrants or other rights to acquire shares.
The shares being offered by Torneaux consist of shares of common stock
that it may purchase from us pursuant to the common stock purchase agreement,
including upon exercise of warrants issued pursuant to that agreement. For
additional information about the stock purchase agreement, please see the
"Common Stock Purchase Agreement" subsection of "THE OFFERING" section of this
prospectus. The address of Torneaux Fund Ltd. is: Montague Sterling Street,
East Bay Street, P. O. Box SS-6238, Nassau, Bahamas.
<TABLE>
<CAPTION>
Number of Number of Common
Common Shares Number of Shares Beneficially
Beneficially Owned Common Shares Owned Following
Name of Stockholder Prior to the Offering Offered Hereby(1) The Offering(1)
---------------------- ---------------------- ----------------- -----------------------------
# of Shares % of Class # of Shares # of Shares % of Class
------------ ----------- ----------------- -------------- -----------
<S> <C> <C> <C> <C> <C>
Torneaux -0- -0- 3,579,545(2) -0-(3) -0-
</TABLE>
* Less than 1% of the outstanding common stock.
(1) Assumes the sale of the shares of common stock which have been offered
pursuant to the prospectus.
(2) Includes the resale of up to 2,386,364 shares of common stock which we
have the right to cause Torneaux to purchase pursuant to the common stock
purchase agreement and the resale of up to 1,193,181 shares that may be
acquired upon the exercise of warrants. Under the common stock purchase
agreement we are required to issue warrants to purchase from
30% to 50% of the number of shares we sell to Torneaux.
(3) Assumes the resale of shares to be acquired by Torneaux pursuant to the
common stock purchase agreement or upon the exercise of warrants.
Torneaux
Torneaux Fund Ltd. is engaged in the business of investing in publicly
traded equity securities for its own account. Torneaux's principal offices are
located at Montague Sterling Street, East Bay Street, Nassau, Bahamas.
Investment decisions for Torneaux are made by its board of directors. Torneaux
does not currently own any of our securities as of the date of this prospectus.
Other than its obligation to purchase common shares under the common stock
purchase agreement, it has no other commitments or arrangements to purchase or
sell any of our securities. There are no business relationships between Torneaux
and us other than the common stock purchase agreement.
41
<PAGE>
Plan of Distribution
We have been advised by Torneaux Fund Ltd. that it may sell the common
stock from time to time in transactions on the OTC Bulletin Board, or any
exchange where the common stock is then listed, in negotiated transactions, or
otherwise, or by a combination of these methods, at fixed prices which may be
changed, at market prices at the time of sale, at prices related to market
prices or at negotiated prices. Tourneaux Fund Ltd. may effect these
transactions by selling the common stock to or through broker-dealers, who may
receive compensation in the form of discounts, concessions or commissions from
Torneaux Ltd. or the purchasers of common stock to or through broker-dealers,
who may receive compensation in the form of discounts, concessions or
commissions from Tourneaux Fund Ltd. or the purchasers of common stock for whom
the broker-dealer may act as an agent or to whom it may sell the common stock as
a principal, or both. The compensation to a particular broker-dealer may be in
excess of customarycommissions.
Tourneaux Fund Ltd. is an "underwriter" within the meaning of the
Securities Act in connection with the sale of the common stock offered hereby.
Assuming that we are in compliance with the conditions of the common stock
purchase agreement, Tourneaux Fund Ltd. must accept draw downs of shares from
us, subject to maximum aggregate dollar amounts, during the 15 month term of the
agreement. Broker-dealers who act in connection with the sale of the common
stock may also be deemed to be underwriters. Profits on any resale of the common
stock as a principal by such broker-dealers may be deemed to be underwriting
discounts and commissions under the Securities Act. Any broker-dealer
participating in such transactions as agent may receive commissions from
Tourneaux Fund Ltd. and, if they act as agent for the purchaser of our common
stock, from such purchaser. Broker-dealers may agree with Tourneaux Fund Ltd. to
sell a specified number of shares of our common stock at a stipulated price per
share, and, to the extent such a broker-dealer is unable to do so acting as
agent for Tourneaux Fund Ltd., to purchase as principal any unsold common stock
at the price required to fulfill the broker-dealer commitment to Torneaux Ltd.
Broker-dealers who acquire common stock as principal may thereafter resell the
common stock from time to time in transactions (which may involve crosses and
block transactions and which may involve sales to and through other
broker-dealers, including transactions of the nature described above) in the
over-the-counter market, in negotiated transactions or otherwise, at market
prices prevailing at the time of sale or at negotiated prices, and in connection
with such resales may pay to or receive from the purchasers of such common stock
commissions computed as described above.
The common stock offered hereby is being registered pursuant to our
contractual obligations, and we have agreed to pay the costs of registering the
shares hereunder. We have also agreed to pay Torneaux Fund Ltd.'s fees, expenses
and disbursements of counsel for Torneaux Ltd. for the preparation of the
agreement up to a maximum of $50,000, and all reasonable fees incurred in
connection with any amendment, modification or waiver, to or enforcement of the
agreement.
42
<PAGE>
The price at which the common shares will be issued by us to Torneaux
Fund Ltd. will fluctuate. The price will be between 88% and 90.5% of the daily
volume weighted average closing price over an 20-day trading period on the OTC
Bulletin Board for each draw down period. We cannot obligate Torneaux to
purchase any of our common shares at less than $1.00 per share, before applying
the agreed upon discount ranging between 9.5% and 12%. Please see the "Common
Stock Purchase Agreement" subsection of "THE OFFERING" section of this
prospectus.
43
<PAGE>
Description of Capital Stock
Magnitude is currently authorized by its Certificate of Incorporation
to issue an aggregate 103,000,000 shares of capital stock, including 100,000,000
shares of Common Stock, $.0001 par value per share of which 15,479,163 were
issued and outstanding as of June 30, 2000 and 3,000,000 shares of Preferred
Stock, $0.01 par value per share of which: 2,500 shares have been designated as
Cumulative Preferred Stock, par value $0.0001 per share, of which 1 share was
outstanding as of June 30, 2000; 300,000 shares have been designated as Series A
Senior Convertible Preferred Stock (the "Series A Stock"), $0.001 par value per
share of which 29,300 were issued and oustanding as of June 30, 2000; 350,000
shares have been designated as Series B Senior Convertible Preferred Stock (the
"Series B Stock"), par value $0.001 per share, of which 222,228 shares were
outstanding as of June 30, 2000, and; 120,000 shares have been designated as
Series C Senior Convertible Preferred Stock (the "Series C Stock") par value
$0.001 per share of which 100,000 shares were outstanding as of June 30, 2000.
Common Stock
The holders of Common Stock are entitled to one vote for each share
held of record on all matters submitted to a vote of stockholders. Subject to
the rights and preferences of the holders of any outstanding Preferred Stock,
the holders of Common Stock are entitled to receive ratably such dividends as
are declared by the Board of Directors out of funds legally available therefor.
In the event of a liquidation, dissolution or winding-up of the Company, holders
of Common Stock have the right to a ratable portion of assets remaining after
the payment of all debts and other liabilities of the Company, subject to the
liquidation preferences, if any, of the holders of any outstanding Preferred
Stock. Holders of Common Stock have neither preemptive rights nor rights to
convert their Common Stock into any other securities and are not subject to
future calls or assessments by the Company. There are no redemption or sinking
fund provisions applicable to the Common Stock. The rights, preferences and
privileges of the holders of Common Stock may be subject to, and may be
adversely affected by, the rights of the holders of shares of Preferred Stock
that the Company may designate and issue in the future.
Preferred Stock
The Board of Directors of the Company recently took action to create
and authorize the issuance of (1) up to 300,000 shares of Preferred Stock
designated as Series A Senior Convertible Preferred Stock of which 29,300 shares
were issued and outstanding as of June 30, 2000 (the "Series A Stock"); (2) up
to 350,000 shares of Preferred Stock designated as Series B Senior Convertible
Preferred Stock (the "Series B Stock') of which 222,228 shares were outstanding
as of June 30, 2000, and; (3) up to 120,000 shares of Preferred Stock designated
as Series C Senior Convertible Preferred Stock (the "Series C Stock") of which
100,000 shares were outstanding as of June 30, 2000.
44
<PAGE>
The Series A Stock
The Series A Stock has no voting rights and their holders do not have a
right to cast a vote on shareholder matters. The holders of Series A Stock are
entitled to receive semi-annual cumulative dividends before any dividends are
declared and paid upon the Common Stock, but on par with the holders of any
Series B Stock and Series C Stock, calculated against their liquidation price of
$5.00 per share at the rate of 7% annually during the first year of their
issuance, increasing thereafter in increments of 1/2 of 1% per year for the next
six years when the interest rate is fixed at 10% annually. In the event of a
liquidation, dissolution or winding up of the affairs of Magnitude and after
payment of its debts and liabilities, the holders are entitled to be paid out of
the remaining assets a liquidation price of $5.00 per share of Series A Stock,
on an equal basis with the holders of any Series B Stock and Series C Stock.
Magnitude has the right to redeem or buy back part or all of the Series A Stock
three years after their issuance by paying to the holders the liquidation price
($5.00 per share), any accumulated but unpaid dividends and a payment (a "call
premium") equal to 15% of the liquidation price. Holders of the Series A Stock
can convert their shares into Magnitude Common Stock at a conversion rate equal
to 150% of the "market price" of Magnitude's Common Stock at the time of
conversion. "Market price" is based upon the average bid and asked prices for
Magnitude's Common Stock as quoted by the then stock exchange during the 20
consecutive trading day period immediately preceding the conversion.
The Series B Stock
The Series B Stock has no voting rights and their holders do not have a
right to cast a vote on shareholder matters. The holders of Series B Stock are
entitled to receive semi-annual cumulative dividends before any dividends are
declared and paid upon the Common Stock, but on a par with the holders of any
Series A Stock and Series C Stock, calculated against their liquidation price of
$9.00 per share at the rate of 7% annually. In the event of a liquidation,
dissolution or winding up of the affairs of Magnitude and after payment of its
debts and liabilities, the holders are entitled to be paid out of the remaining
assets a liquidation price of $9.00 per share of Series B Stock, on an equal
basis with the holders of any Series A Stock and Series C Stock. Magnitude has
the right to redeem or buy back part or all of the Series B Stock three years
after their issuance by paying to the holders the liquidation price ($9.00 per
share), any accumulated but unpaid dividends and a payment (a "call premium")
equal to 10% of the liquidation price. Holders of the Series B Stock can convert
their shares into Magnitude Common Stock on the basis of 10 shares of Common
Stock for one share of Series B Stock at any time.
The Series C Stock
The Series C Stock has no voting rights and their holders do not have a
right to cast a vote on shareholder matters. The holders of Series C Stock are
entitled to receive monthly cumulative dividends before any dividends are
declared and paid upon the Common Stock, but on par with the holders of any
Series A Stock and Series B Stock, calculated against their liquidation price of
$9.00 per share at the rate of 7% annually. In the event of a liquidation,
dissolution or winding up of the affairs of Magnitude and after payment of its
debts and liabilities, the holders are entitled to be paid out of the remaining
45
<PAGE>
assets a liquidation price of $9.00 per share of Series C Stock, on an equal
basis with the holders of any Series A Stock and Series B Stock. Magnitude has
the right to redeem or buy back part or all of the Series C Stock three years
after their issuance by paying to the holders the liquidation price ($9.00 per
share), any accumulated but unpaid dividends and a payment (a "call premium")
equal to 10% of the liquidation price. Holders of the Series C Stock can convert
their shares into Magnitude Common Stock on the basis of 10 shares of Common
Stock for one share of Series C Stock at any time.
Cumulative Preferred Stock
The Company has designated 2,500 shares as "Cumulative Preferred
Stock", of which as of June 30, 2000, one share is issued and outstanding. The
Cumulative Preferred Stock is non-voting. Each share shall be entitled to
receive out of the surplus or net profits of the Company, cumulative dividends
thereon at the rate of $9,000 per year, payable quarterly, semi-annually, or
annually, as and when declared by the Board of Directors. The Cumulative
Preferred Stock shall, with respect to dividend rights, rights on liquidation,
winding up and dissolution and rights upon redemption, rank prior to all classes
and series of Common Stock.
Legal Matters
The Company is not a party in any legal proceedings.
46
<PAGE>
Where You Can Find More Information
We file annual, quarterly and special reports with the Securities and
Exchange Commission. Our Securities and Exchange Commission filings are
available to the public over the Internet at the Securities and Exchange
Commission's web site at http://www.sec.gov. You may also read and copy any
document we file at the Securities and Exchange Commission's public reference
rooms located at 450 Fifth Street, N.W., Washington, DC 20549, and its public
reference facilities in New York, New York and Chicago, Illinois. Please call
the Securities and Exchange Commission at 1-800-SEC-0330 for further information
on the public reference rooms and their copy charges.
This prospectus is part of a Form SB-2 registration statement that we
filed with the SEC. This prospectus provides you with a general description of
the securities that may be offered for sale, but does not contain all of the
information that is in the registration statement. To see more detail, you
should read the entire registration statement and the exhibits filed with the
registration statement. Copies of the registration statement and the exhibits
are on file at the offices of the Commission and may be obtained upon payment of
the fees prescribed by the Commission, or examined without charge at the public
reference facilities of the Commission described above.
You should rely only on the information incorporated by reference or
provided in this prospectus or any prospectus supplement. We have not authorized
anyone to provide you with different information.
Neither Magnitude nor Torneaux Fund Ltd., the selling stockholder, is
making an offer of the securities covered by this prospectus in any state where
the offer is not permitted. You should not assume that the information in this
prospectus or any prospectus supplement or in any other document incorporated by
reference in this prospectus is accurate as of any date other than the date on
the front of those documents.
Upon request, we will provide without charge a copy of our Annual,
Quarterly and Current Reports we have filed electronically with the Commission
as well as a copy of any and all of the information that has been or may be
incorporated by reference in this prospectus. Requests for such copies should be
directed to Magnitude Information Systems, Inc., 401 State Route 24, Chester,
New Jersey 07930 (telephone: 908-879-2722).
You should rely only on the information incorporated by reference or
provided in this prospectus or any prospectus supplement. We have authorized
no one to provide you with different information. We are not making an offer
of these securities in any state where the offer is not permitted.
You should not assume that the information in this prospectus or any
prospectus supplement is accurate as of any date other than the date on the
front of this document.
---------------
47
<PAGE>
Magnitude Information Systems, Inc.
Index to Financial Statements
Magnitude Information Systems, Inc. and Subsidiaries
Audited Consolidated Financial Statements as of December 31, 1999 and
for the years ended December 31, 1999 and 1998.
Audited Consolidated Financial Statements as of December 31, 1998 and
for the years ended December 31, 1998 and 1997.
48
<PAGE>
Magnitude Information Systems, Inc. and Subsidiaries
Index to the Consolidated Financial Statements
December 31, 1999
Page
Independent Auditors' Report....................................... 69
Financial Statements
Consolidated Balance Sheet.................................... 70
Consolidated Statements of Operations......................... 71
Consolidated Statement of Stockholders Equity (Deficit)....... 72-73
Consolidated Statements of Cash Flows......................... 74-75
Notes to the Consolidated Financial Statements................ 76-85
49
<PAGE>
[Letterhead of
Rosenberg Rich Baker Berman & Company ]
Independent Auditors' Report
To the Board of Directors and Stockholders of
Magnitude Information Systems, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Magnitude
Information Systems, Inc. and Subsidiaries as of December 31, 1999 and the
related consolidated statements of operations, stockholders' equity (deficit),
and cash flows for the two years ended December 31, 1999 and 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Magnitude
Information Systems, Inc. and Subsidiaries as of December 31, 1999 and the
consolidated results of their operations and their cash flows for the years
ended December 31, 1999 and 1998, in conformity with generally accepted
accounting principles.
s/Rosenberg Rich Baker Berman & Company
Bridgewater, New Jersey
March 24, 2000
50
<PAGE>
Magnitude Information Systems, Inc. and Subsidiaries
Consolidated Balance Sheet
December 31, 1999
<TABLE>
<CAPTION>
Assets
Current Assets
<S> <C>
Cash $ 249,569
Accounts receivable net of allowance for doubtful accounts of $78,301 58,724
Inventories 8,885
Miscellaneous receivables 16,627
Deferred tax asset 201,470
Prepaid expenses 388,881
--------------
Total Current Assets 924,156
Property, plant and equipment, net of accumulated depreciation of $145,579 99,880
Software, net of accumulated amortization of $261,662 1,193,728
Other assets 2,459
==============
Total Assets 2,220,223
==============
Liabilities and Stockholders' Equity (Deficit)
Current Liabilities
Accounts payable and accrued expenses 806,265
Accrued contingent liability 374,890
Dividends payable 9,000
Loans payable 754,541
Notes payable 1,475,000
Current maturities of long-term debt 1,038,779
Current maturities of capitalized lease obligations 6,938
--------------
Total Current Liabilities 4,465,413
Long term debt, less current portion 22,750
Obligations under capital leases, excluding current maturities 13,005
--------------
Total Liabilities 4,501,168
--------------
Minority Interest -
Stockholders' Equity (Deficit)
Preferred stock Series A, $.01 par value, authorized 3,000,000 shares; issued and
outstanding, 0 shares -
Cumulative preferred stock, $.001 par value; 2,500 shares authorized, 10 shares
issued and outstanding -
Common stock, $.0001 par value, 30,000,000 shares authorized; 10,340,261 shares issued
and outstanding 1,034
Contributed capital 81,000
Additional paid in capital 8,935,034
Accumulated deficit (11,298,013)
--------------
Total Stockholders' Equity (Deficit) (2,280,945)
--------------
Total Liabilities and Stockholders' Equity (Deficit) $ 2,220,223
==============
</TABLE>
See notes to the consolidated financial statements.
51
<PAGE>
Magnitude Information Systems, Inc. and Subsidiaries
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1999 1998
--------------- --------------
Net Sales
<S> <C> <C>
Hardware Products $ 2,850 $ 2,853,969
Software 260,703 72,486
--------------- --------------
Total Net Sales 263,553 2,926,455
--------------- --------------
Cost of Good Sold
Hardware Products 2,850 1,450,367
Software 167,971 140,073
--------------- --------------
Total Cost of Goods Sold 170,821 1,590,440
Gross Profit 92,732 1,336,015
Selling, general and administrative expenses 2,735,721 3,924,777
--------------- --------------
(Loss) From Operations (2,642,989) (2,588,762)
--------------- --------------
Other Income (Expense)
Miscellaneous income 133,520 86,872
Interest income - 1,384
Miscellaneous expense (40,542) (182,385)
Interest expense (293,553) (343,394)
Loss on disposition of assets (38,758) (104,336)
--------------- --------------
Total Other (Expense) (239,333) (541,859)
--------------- --------------
(Loss) From Continuing Operations Before Provision for Income Taxes (2,882,322) (3,130,621)
Provision for (Benefit from) Income Taxes 490,374 -
--------------- --------------
(Loss) From Continuing Operations (2,391,948) (3,130,621)
Discontinued Operations
Gain on disposal of hardware line of business (net of $0 income tax
effect) - 599,712
=============== ==============
Net (Loss) $ (2,391,948) $ (2,530,909)
=============== ==============
Net (Loss) Per Common Share:
(Loss) From Continuing Operations $ (.28) $ (.72)
Discontinued Operations - .14
Net (Loss) $ (.28) $ (.58)
--------------- --------------
Weighted Average of Common Shares Outstanding 8,486,443 4,324,292
=============== ==============
</TABLE>
See notes to the consolidated financial statements.
52
<PAGE>
Magnitude Information Systems, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity (Deficit)
Years Ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
Convertible Cumulative
Preferred Shares Preferred Shares Common Stock
------------ --------------- ------------------
Shares Amount Shares Amount Shares Amount
------------- ----- --------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1999 - $ - 10 $ - 6,431,113 $ 643
Issuances of common stock granted for
services performed - - - - 1,404,328 140
Issuances of common stock pursuant to stock option
exercise loan agreement - - - - 535,000 53
Issuance of common stock for conversion of loans
and accrued interest - - - - 767,332 77
Issuance of common stock pursuant to note penalty
clause - - - - 60,000 6
Contingent liability pursuant to put option
agreement - - - - - -
Exchange of the Company's common stock, one common
share for 3.4676 common shares of Magnitude, Inc. - - - - 7,210 1
Issuance of common shares pursuant to private
equity placements - - - - 1,050,000 105
Cancellation of previously issued common stock - - - - (7,500) (1)
Issuance of common stock pursuant to anti-dilution
clause - - - - 77,778 8
Issuance of common stock to suppliers pursuant to
grant - - - - 15,000 2
Issuance of convertible debt with attached warrants - - - - - -
Net loss, year ended December 31, 1999 - - - - - -
---- ------- ----- -------- ---------- ------
Balances, December 31, 1999 - $ - 10 $ - 10,340,261 $1,034
==== ======= ===== ======== ========== ======
</TABLE>
See notes to the consolidated financial statements
53A
<PAGE>
<TABLE>
<CAPTION>
Total
Contributed Additional Accumulated Stockholder
Capital Paid in Deficit Equity
----------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Balances, January 1, 1999 $ 81,000 $ 6,832,728 $(8,906,065) $ (1,991,694)
Issuances of common stock granted for
services performed - 1,224,030 - 1,224,170
Issuances of common stock pursuant to stock option
exercise loan agreement - 267,446 - 267,499
Issuance of common stock for conversion of loans
and accrued interest - 383,590 - 383,667
Issuance of common stock pursuant to note penalty
clause - (6) - -
Contingent liability pursuant to put option
agreement - (374,890) - (374,890)
Exchange of the Company's common stock, one common
share for 3.4676 common shares of Magnitude, Inc. - (1) - -
Issuance of common shares pursuant to private
equity placements - 524,895 - 525,000
Cancellation of previously issued common stock - 1 - -
Issuance of common stock pursuant to anti-dilution
clause - (8) - -
Issuance of common stock to suppliers pursuant to
grant - 5,249 - 5,251
Issuance of convertible debt with attached warrants - 72,000 - 72,000
Net loss, year ended December 31, 1999 - - (2,391,948) (2,391,948)
-------- ---------- -------------- --------------
Balances, December 31, 1999 $ 81,000 $8,935,034 $(11,298,013) $2,280,945)
========= =========== ============== ==============
</TABLE>
See notes to the consolidated financial statements
53B
<PAGE>
Magnitude Information Systems, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity (Deficit)
Years Ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
Convertible Cumulative
Preferred Shares Preferred Shares Common Stock
Shares Amount Shares Amount Shares Amount
-------- --------- -------- --------- ------------- --------
<S> <C> <C> <C> <C> <C>
Balances, January 1, 1998 - $ - 10 $ - 2,898,507 $ 290
Accrued Dividends on cumulative preferred shares
reversed - - - - - -
Dividends on cumulative preferred shares waiver
reversed - - - - - -
Issuances of common stock to domestic private
individuals pursuant to an exemption under Rule - - - - 79,722 8
506
Issuances of common stock to foreign investors
pursuant to Reg. S. - - - - 1,453,644 145
Exchange of the Company's common stock, one
common share for 3.4676 common shares of - - - - 22,061 2
Magnitude, Inc.
Issuance of common stock for conversion of
accrued interest on private placement notes - - - - 10,411 1
Issuance of common stock in exchange for prepaid
advertising - - - - 150,000 15
Issuance of common stock pursuant to Rolina
Corporation merger - - - - 155,556 16
Issuance of common stock pursuant to Vanity
Software Publishing Corporation acquisition - - - - 224,000 22
Issuance of common stock granted for services
performed - - - - 1,080,177 108
Issuance of common stock for conversion of loan
and accrued interest - - - - 342,000 34
Issuance of common stock pursuant to sales
incentive awards - - - - 5,035 1
Issuance of common stock in exchange for product
rights - - - - 10,000 1
Net loss, year ended December 31, 1998 - - - - - -
-------- --------- -------- --------- ------------- --------
Balances, December 31, 1998 - $ - 10 $ - 6,431,113 $ 643
======== ========= ======== ========= ============= ========
</TABLE>
See notes to the consolidated financial statement
54A
<PAGE>
<TABLE>
<CAPTION>
Total
Contributed Additional Accumulated Stockholders
Capital Paid in Deficit Equity
Capital (Deficit)
------------ ------------ --------------- ---------------
<S> <C> <C> <C> <C> <C>
Balances, January 1, 1998 $ 243,000 $ 2,314,856 $ (6,555,156) $ (3,997,010)
Accrued Dividends on cumulative preferred shares
reversed - - 18,000 18,000
Dividends on cumulative preferred shares waiver
reversed (162,000) - 162,000 -
Issuances of common stock to domestic private
individuals pursuant to an exemption under Rule - 199,992 - 200,000
506
Issuances of common stock to foreign investors
pursuant to Reg. S. - 2,586,855 - 2,587,000
Exchange of the Company's common stock, one
common share for 3.4676 common shares of - (2) - -
Magnitude, Inc.
Issuance of common stock for conversion of
accrued interest on private placement notes - 36,101 - 36,102
Issuance of common stock in exchange for prepaid
advertising - 374,985 - 375,000
Issuance of common stock pursuant to Rolina
Corporation merger - 388,874 - 388,890
Issuance of common stock pursuant to Vanity
Software Publishing Corporation acquisition - 559,978 - 560,000
Issuance of common stock granted for services
performed - 29,892 - 30,000
Issuance of common stock for conversion of loan
and accrued interest - 341,199 - 341,233
Issuance of common stock pursuant to sales
incentive awards - (1) - -
Issuance of common stock in exchange for product
rights - (1) - -
Net loss, year ended December 31, 1998 - - (2,530,909) (2,530,909)
------------ ------------ --------------- ---------------
Balances, December 31, 1998 $ 81,000 $ 6,832,728 $ (8,906,065) $ (1,991,694)
============ ============ =============== ===============
</TABLE>
See notes to the consolidated financial statement
54B
<PAGE>
Magnitude Information Systems, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
----------------------------------
1999 1998
--------------- ---------------
Cash Flows From Operating Activities
<S> <C> <C>
Net Income (Loss) $ (2,391,948) $ (2,530,909)
Adjustments to Reconcile Net (Loss) to Net Cash (Used) by Operating
Activities
Depreciation and amortization 183,053 266,589
Common stock issued for various expenses 474,119 -
Loss on disposition of assets 38,758 112,112
Bad debt provision 4,109 94,287
Forgiveness of debt - (32,893)
New debt issued for interest expense 5,400 -
Deferred tax (benefit) (201,470) -
Inventory variance - 132,890
Inventory writeoff 16,770 -
Return reserve provision - 30,000
Decreases (Increases) in Assets
Accounts receivable 46,416 50,956
Miscellaneous receivables 58,951 (54,743)
Inventories 1,134 (317,650)
Prepaid expenses (3,273) 36,996
Other assets 2,652 414
Increases (Decreases) in Liabilities
Accounts payable and accrued expenses (189,975) 403,405
Trade acceptance payable - (44,860)
--------------- ---------------
Net Cash (Used) by Operating Activities (1,955,304) (1,853,406)
--------------- ---------------
Cash Flows From Investing Activities
Purchases of equipment, fixtures, and software (6,486) (569,857)
Sales of property and equipment 250 716,926
--------------- ---------------
Net Cash Provided (Used) by Investing Activities (6,236) 147,069
--------------- ---------------
Cash Flows From Financing Activities
Repayment of notes payable - (25,000)
Proceeds from long-term debt 300,000 342,000
Proceeds from long-term debt with detachable warrants 800,000 -
Repayment of long-term debt (50,474) (750,577)
Repayment of capital lease obligations (7,747) (7,229)
Repayment of officer loans payable - (85,000)
Proceeds from loans payable 726,181 -
Repayment of loans payable (91,254) (275,000)
Proceeds from issuance of common stock 525,000 2,512,000
--------------- ---------------
Net Cash Provided by Financing Activities 2,201,706 1,711,194
--------------- ---------------
Net increase in Cash 240,166 4,857
Cash at beginning of period 9,403 4,546
=============== ===============
Cash at end of period $ 249,569 $ 9,403
=============== ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest Paid $ 153,313 $ 245,916
=============== ===============
Taxes Paid $ 6,600 $ 4,320
=============== ===============
</TABLE>
See notes to the consolidated financial statements.
55
<PAGE>
Magnitude Information Systems, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1999 1998
-------------- ---------------
Schedule of non-cash investing and financing activities
In connection with the retirement of $36,102 of accrued interest on a promissory
<S> <C>
note, 10,411 common shares were issued $ 36,102
===============
Capitalized lease obligations incurred for use of equipment $ 26,376
===============
In connection with the acquisition of a 20% equity interest in Input
Technologies LLC, $60,000 of accounts receivable were written off $ 60,000
===============
In connection with the Rolina Corporation merger, secured payment obligation
Incurred $ 100,000
===============
In connection with the obtaining of prepaid advertising, 150,000 common shares
were issued $ 375,000
===============
In connection with the Rolina Corporation merger, 155,556 common shares were
issued $ 388,890
===============
In connection with the Vanity Software Publishing Corporation acquisition,
224,000 common shares were issued $ 560,000
===============
In connection with the issuance of common stock, 72,677 shares were issued as
consideration for past services $ 30,000
===============
In connection with the retirement of a $316,849 promissory note and accrued
interest thereon, 342,000 common shares were issued $ 341,233
===============
In connection with the disposition of a 20% equity interest in Input
Technologies LLC, $20,392 of accounts payable and accrued expenses were <C>
written off $ 20,392
==============
In connection with the trade-in of capitalized lease equipment for operating
lease equipment, $17,975 of capitalized lease obligations were written off $
17,975
==============
In connection with the Rolina Corporation merger agreement, a put option on
155,556 shares at $2.41 was set up as an accrued contingent liability $ 374,890
==============
In connection with the retirement of a $100,000 promissory note and accrued
interest thereon, 202,332 common shares were issued $ 101,166
==============
In connection with a stock option exercise, 535,000 common shares were issued
against the cancellation of loans and notes totaling $261,604 along with
accrued interest thereon. $ 267,500
==============
In connection with the retirement of promissory notes totaling $256,959 plus
accrued interest thereon, 565,000 common shares were issued $ 282,500
==============
In connection with the issuance of a promissory note totaling $119,735 , $29,735
of accrued interest on various notes was incorporated into a new note. $ 29,735
==============
In connection with the issuance of common stock, 1,419,328 common shares were
issued for past services $ 721,619
==============
In connection with the issuance of 1,000,000 common shares during the year ended
December 31, 1998, $276,230 for past services was relieved; notes totaling
$134,295 with accrued interest of $19,692 were retired, and loans and
advances of $77,585 were retired during the year ended December 31, 1999. $ 507,802
==============
</TABLE>
See notes to the consolidated financial statements.
56
<PAGE>
Magnitude Information Systems, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Organization
Magnitude Information Systems, Inc. (the "Company") was incorporated as
a Delaware corporation on April 19, 1988 under the name Fortunistics
Inc. On March 4, 1993, the Company changed its name to Whitestone
Industries, Inc. On July 14, 1997, the Company changed its name to
Proformix Systems, Inc., and on November 18, 1998, the Company changed
its name to Magnitude Information Systems, Inc.
The Company and Magnitude, Inc. remain as two separate legal
entities whereby Magnitude, Inc. operates as a subsidiary of the
Company. However, the operations of the newly combined entity are
currently comprised solely of the operations of Magnitude, Inc.
The remaining 1% of Magnitude, Inc. stockholders hold a minority
interest which is valued at $0.
On February 2, 1998, the Company entered into an Agreement and Plan of
Merger with Rolina Corporation, a privately held New Jersey software
developing firm, and on April 30, 1998, into an Asset Purchase
Agreement with Vanity Software Publishing Co., a Canadian developer of
specialized software, whereby the Company, in return for payments in
the form of cash and equity, acquired the rights to certain software
products and related assets, with such software products subsequently
forming the basis for the further development, during the year, of the
Company's proprietary EMS Software System.
On November 18, 1998, the Company and its wholly owned subsidiary
Magnitude, Inc. entered into an Asset Purchase Agreement and several
related agreements with 1320236 Ontario Inc. ("OS"), a publicly traded
Canadian designer, manufacturer and distributor of office furniture
based in Holland Landing, Ontario, Canada, pursuant to which OS
acquired Magnitude, Inc.'s hardware product line comprised of the
Company's ergonomic keyboard platform products and accessories, and all
related inventory and production tooling and warehousing assets, and
all intellectual property rights including the Proformix name, against
a cash consideration and on ongoing contingent stream of royalty
payments on OS' sales of the Magnitude hardware products. The Agreement
with OS also provided for the retirement of the Company's then existing
bank debt out of the proceeds of the transaction.
Until November 18, 1998, when the Company sold its hardware product
line comprised of Magnitude, Inc.'s ergonomic keyboard platform
products and accessories, its business was primarily centered around
the design, development, manufacture, and marketing of research-based
ergonomic accessory products for the computerized workplace. In
parallel, and beginning with the February 1998 acquisition by the
Company of Rolina Corporation, an early stage software business which
had developed an ergonomic software product. that was being marketed
under the name "ErgoSentry", and the subsequent acquisition in May 1998
of substantially all of the assets of Vanity Software Publishing
Corporation, a Canadian software firm, which also included a certain
ergonomic software package known as "ErgoBreak", the Company engaged in
the development of a unique suite of software packages designed to
increase productivity in the computer related work environment which
include the before mentioned "ErgoSentry" and "ErgoBreak" products.
These efforts resulted, in November 1998, in the release to the market
of the proprietary "EMS (Ergonomic Management System)" software system.
With the sale of the hardware product line, the Company's business is
now focused exclusively on the further development and marketing of
these software products. As such, the Company currently must be
considered an enterprise in transition, because it has not yet realized
material revenues from licensing its software.
57
<PAGE>
Magnitude Information Systems, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continuted)
Nature of Organization - (continued)
Magnitude Inc.'s wholly owned subsidiary, Corporate Ergonomic
Solutions, Inc. (Ergonomics) was incorporated in the State of New
Jersey during October 1992. Ergonomics, which commenced operations in
September 1998, was formed primarily to market Proformix's hardware
products which has since been disposed of. Prior to that, its
operations had not been significant. It's operations during 1998 and
1999 have not been significant.
Principles of Consolidation
The consolidated financial statements include the accounts of
Magnitude Information Systems, Inc. and its subsidiaries,
Magnitude, Inc. and Corporate Ergonomic Solutions, Inc. All
significant intercompany balances and transactions have been
eliminated.
Inventories
Inventory consists of finished goods related to the Company's former
hardware product line which are stated at the lower of cost (determined
by the first-in, first out method) or market. The sale of the Company's
hardware product line resulted in a loss on disposal of inventory of
$74,736 in 1998.
Depreciation and Amortization
Property, plant and equipment are recorded at cost. Depreciation on
equipment, furniture and fixtures and leasehold improvements is
computed on the straight line method over the estimated useful lives of
such assets between 5-10 years. Maintenance and repairs are charged to
operations as incurred. Software assets acquired pursuant to the Rolina
and Vanity agreements are amortized on the straight line method over 10
years. Repairs and maintenance which do not extend the useful lives of
the related assets are expensed as incurred.
Securities Issued for Services
The Company accounts for stock, stock options and stock warrants issued
for services and compensation by employees under the intrinsic value
method. For non-employees, the fair market value of the Company's stock
on the date of stock issuance or option grant is used. Effective
January 1, 1996, the Company adopted Statement of Financial Accounting
Standard (SFAS) No. 123, "Accounting for Stock-based Compensation". The
statement generally suggests, but does not require, employee
stock-based compensation transactions be accounted for based on the
fair value of the services rendered or the fair value of the equity
instruments issued, whichever is more reliably measurable. As permitted
by the statement, the Company has elected to continue to follow the
requirements of Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees' for employees under the intrinsic value
method. The adoption of SFAS No. 123 does not have a material impact on
the financial statements.
Income Taxes
The Company provides for income taxes based on enacted tax law and
statutory tax rates at which items of income and expenses are expected
to be settled in the Company's income tax return. Certain items of
revenue and expense are reported for Federal income tax purposes in
different periods than for financial reporting purposes, thereby
resulting in deferred income taxes. Deferred taxes are also recognized
for operating losses that are available to offset future taxable
income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized. The Company
has incurred net operating losses for financial-reporting and
tax-reporting purposes. Accordingly, for Federal income tax purposes,
the benefit for income taxes has been offset entirely by a valuation
allowance against the related federal deferred tax asset for the year
ended December 31, 1999. For state income tax purposes, a partial
valuation allowance has been offset against the related state deferred
tax asset for the year ended December 31, 1999.
58
<PAGE>
Magnitude Information Systems, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continuted)
Net Loss Per Share
Net loss per share, in accordance with the provisions of Financial
Accounting Standards Board No. 128, "Earnings Per Share," is computed
by dividing net loss by the weighted average number of shares of Common
Stock outstanding during the period. Common Stock equivalents have not
been included in this computation since the effect would be
anti-dilutive.
Revenue Recognition
Revenue from hardware product sales is recognized at the time of
shipment provided that the resulting receivable is deemed probable of
collection. Revenue from software sales is recognized at the time of
licensing provided that the resulting receivable is deemed probable of
collection.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
CONCENTRATIONS OF BUSINESS AND CREDIT RISK
The Company maintains cash balances in several financial institutions which
are insured by the Federal Deposit Insurance Corporation up to $100,000.
Balances in these accounts may, at times, exceed the federally insured
limits.
The Company provides credit in the normal course of business to customers
located throughout the U.S. The Company performs ongoing credit evaluations
of its customers and maintains allowances for doubtful accounts based on
factors surrounding the credit risk of specific customers, historical
trends, and other information.
INVENTORIES
Inventories consisted of the following at December 31, 1999:
<TABLE>
<CAPTION>
<S> <C>
Finished goods $ 8,885
---------------
$ 8,885
===============
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following at December 31,
1999:
Equipment $ 134,619
Furniture and fixtures 65,070
Leasehold improvements 45,770
----------------
245,459
Less accumulated depreciation 145,579
----------------
$ 99,880
================
</TABLE>
Depreciation expense charged to operations was $37,514 and $107,928 in 1999
and 1998, respectively.
59
<PAGE>
Magnitude Information Systems, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following at
December 31, 1999:
<TABLE>
<CAPTION>
<S> <C>
Accounts payable $ 154,103
Accrued interest 342,994
Accrued commissions 43,222
Accrued returns 35,718
Accrued legal settlement 20,000
Accrued professional fees 72,698
Accrued taxes 4,300
Accrued payroll 98,268
Miscellaneous accruals 14,962
Accrued warranties 20,000
--------------------
$ 806,265
====================
LOANS PAYABLE
The Company and Magnitude, Inc. had borrowings under short term loan agreements with the following terms and
conditions at December 31, 1999:
Pursuant to three promissory notes signed throughout 1995 and 1996, an investor advanced
Magnitude, Inc. a total of $90,000 payable upon demand with interest at 12% per annum. In
July, 1999 these obligations and accrued interest thereon totaling $29,735 were converted
into a new promissory note for $119,735 dated August 9, 1999 payable upon 30 days written
notice not to begin before January 2, 2000 of which $60,000 has been repaid. The note has
been subsequently converted into common shares. $ 59,735
On December 4, 1996, Magnitude, Inc. repurchased 500,000 shares of its common stock and retired
same against issuance of a promissory note maturing twelve months thereafter accruing
interest at 5% per annum and due December 4, 1998. This note is overdue at December 31,
1999 and no demand for payment has been made through the date of our report. 75,000
Note dated February 11, 1999 issued to the board chairman, principal due May 31, 2000, accruing
interest at a rate of 10% per annum resulting from advances totaling $351,060 during February
and March 1999. This note is secured by all of Magnitude Inc.'s assets and property and is
guaranteed by the Company. The note has been subsequently converted into common shares. 351,060
Pursuant to a promissory note dated April 26, 1999, a member of the Board of Directors of the
Company advanced the sum of $200,000 which is due June 26, 2000 and accruing interest at the
rate of 12% per annum, convertible at the holders option into shares of the common stock of
the Company at the rate of .50(cent)per share. Repayments of $31,254 have been made on the note. 168,746
Pursuant to the Rolina Corporation Agreement & Plan of Merger dated February 2, 1998 the Company
was to deliver to its current Chairman and CEO of the Company, $100,000 eight months from
the closing date. This indebtedness has been recast as a promissory note maturing October
1, 1999 and accruing interest at 10% per annum. In consideration of the indebtedness, the
current Chairman and CEO has a lien on certain software products owned by the Company. The
note has been subsequently repaid by the Company in full. 100,000
---------------
Total $ 754,541
===============
</TABLE>
60
<PAGE>
Magnitude Information Systems, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
NOTES PAYABLE
Private Placement Offering
A private offering was completed in June 1995 resulting in Magnitude,
Inc. selling a total of sixteen (16) units and receiving net proceeds
of $1,364,061 after deducting private placement agent's commission and
legal fees amounting of $235,939. In connection therewith, Magnitude,
Inc. issued 160,000 shares of its $.001 common stock at par. The total
amount of such current notes outstanding at December 31, 1999 was
$1,475,000. The Company has subsequently extended an offer to convert
such notes into a portion of common shares or convertible preferred
shares. As of March 24, 2000, the holders of $1,050,000 worth of notes
have agreed to accept partial repayment of approximately 30% of the
note balance on April 30, 2000 and convert the remaining balance into
common shares or convertible preferred shares.
LONG-TERM DEBT
<TABLE>
<CAPTION>
Long-term debt as of December 31, 1999 is comprised of the following:
Convertible promissory notes issued to seven individual private
accredited investors accruing interest at 7% and maturing from June
23, 2000 through January 20, 2001. The notes
<S> <C>
provide the holders with the option to convert part or all of the outstanding principal $ 1,028,000
amounts into shares of the common stock of the Company at the rate of $0.50 per share.
Discounted present value of a non-interest bearing $70,000 settlement with a former investor
of Magnitude, Inc. to be paid in 24 equal monthly payments commencing July 1, 1997. The
imputed interest rate used to discount the note is 8% per annum. 33,529
--------------
1,061,529
Total
Less current maturities 1,038,779
--------------
Long-term debt, net of current maturities $ 22,750
==============
Total maturities of long-term debt are as follows:
Year Ending December 31,
2000 $ 1,038,779
2001 22,750
---------------
$ 1,061,529
===============
</TABLE>
ACCRUED CONTINGENT LIABILITY
Pursuant to the February 2, 1998, Agreement and Plan of Merger with
Rolina Corporation (see "Nature of Organization), the Company has issued
155,556 shares of its common stock to the principal of Rolina
Corporation who currently serves as the Company's President and Chief
Executive Officer, and has issued a put option for such shares at a
price of $2.41 per share in accordance with the provisions contained
therein, with notice for exercise eligible to be given at any time after
February 1, 2000, and before 5:00 p.m. on the 90th day thereafter. In
view of the relative proximity of the exercise period of the option and
the fact that the market price for the Company's shares currently is
significantly lower than the option put price, the entire amount has
been recognized as an accrued contingent liability.
61
<PAGE>
Magnitude Information Systems, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
CAPITALIZED LEASE OBLIGATIONS
The Company leases office equipment under non-cancelable capital lease
agreements expiring between October 26, 2002 and October 27, 2002. The
capital lease obligations have been recorded at the present value of
future minimum lease payments, discounted at an interest rate of 7.00%.
The capitalized cost of equipment at December 31, 1999 amounted to
$18,023 net of accumulated depreciation of $8,353.
The following is a schedule of minimum lease payments due under capital
leases at December 31, 1999:
Year Ending December 31,
2000 $ 8,211
2001 7,579
2002 6,316
---------------
Total minimum capital lease payments 22,106
Less amounts representing interest 2,163
---------------
Present value of net minimum capital lease payments 19,943
Less current maturities of capital lease obligations 6,938
---------------
Obligations under capital leases, excluding current
maturities $ 13,005
===============
INCOME TAXES
The income tax provision is comprised of the following:
Year Ended December 31,
-----------------------------------
1999 1998
--------------- ---------------
State current provision $ 490,374 $ -
State deferred provision - -
--------------- ---------------
$ 490,374 $ -
=============== ===============
In 1998, the State of New Jersey enacted legislation allowing emerging
technology and/or biotechnology companies to sell their unused New Jersey Net
Operating Loss ("NOL") Carryover and Research and Development Tax Credits
("R&D Credits) to corporate taxpayers in New Jersey. During 1999, the Company
entered into an agreement under which it retained a third party broker to
identify a buyer for its NOL Carryover. The total anticipated net proceeds of
this transaction ($497,238) were recorded as a current deferred tax asset
($201,470) and a tax benefit of $295,768 in the accompanying financial
statements.
Due to limitations placed by the State of New Jersey on the total amount of
NOL Carryover and R&D Credits eligible to be sold in any one year, the sale of
only a portion of the Company's NOL Carryover ($295,768 was completed in
1999). The receipt of these funds was recorded as a reduction to the
non-current deferred tax asset in the accompanying financial statements. The
sale of the remaining balance of the Company's NOL Carryover is anticipated by
the end of the third quarter of 2000.
The Company's total deferred tax asset and valuation allowance are as follows:
December 31,
---------------------------------
1999 1998
---------------- -------------
Total deferred tax asset, noncurrent $ 4,240,000 $ (3,560,000)
Less valuation allowance (4,240,000) (3,560,000)
---------------- -------------
Net deferred tax asset, noncurrent $ - $ -
-----------------------------------------================ -------------
62
<PAGE>
Magnitude Information Systems, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
INCOME TAXES - (Continued)
The differences between income tax benefits in the financial statements
and the tax benefit computed at the combined state and U.S. Federal
statutory rate of 40% are as follows:
Year Ended December 31,
------------------------------------
1999 1998
---------------- ----------------
Tax benefit (40%) (40%)
Valuation allowance 40% 40%
---------------- ----------------
Effective tax rate - -
================ ----------------
At December 31, 1999, the Company has available approximately $10,600,000
of net operating losses to carryforward and which may be used to reduce
future federal taxable income and expire between December 31, 2007 and
2019.
At December 31, 1999, the Company has available approximately $2,800,000
of net operating losses to carryforward and which may be used to reduce
future state taxable income which begin to expire through December 31,
2006.
401(k) PLAN
The Company adopted the qualified Magnitude, Inc. sponsored 401(k) plan
covering substantially all full time employees under which eligible
employees may elect to contribute, within statutory limits, a percentage
of their annual compensation. The Company matches up to 50% of the
employee's contribution of which the match may not exceed 3% of the
employee's total compensation for the plan year. Contributions to the
plan were $9,592 and $16,095 for the years ended December 31, 1999 and
1998, respectively.
STOCK OPTION PLANS
In April 1996, Magnitude, Inc. adopted its 1996 Stock Incentive Plan
("the 1996 Plan"). The 1996 Plan provides that certain options granted
thereunder are intended to qualify as "incentive stock options" (ISO)
within the meaning of Section 422A of the United States Internal Revenue
Code of 1986, while non-qualified options may also be granted under the
Plan. The initial plan and subsequent amendments provided for
authorization of up to 480,000 shares. Pursuant to the above described
stock exchange offer on July 2, 1997, all options under the 1996 Plan
were converted into shares of the Company at a rate of 3.4676 shares of
Magnitude, Inc. to 1 share of the Company.
In September 1997, the Company adopted its 1997 Stock Incentive Plan
("the 1997 Plan"). The 1997 Plan provides that certain options granted
thereunder are intended to qualify as "incentive stock options" (ISO)
within the meaning of Section 422A of the United States Internal Revenue
Code of 1986, while non-qualified options may also be granted under the
Plan. The initial plan and subsequent amendments provided for the grant
of options for up to 1,000,000 shares. The purchase price per share of
common stock deliverable upon exercise of each ISO shall not be less than
100% of the fair market value of the common stock on the date such option
is granted. If an ISO is issued to an individual who owns, at the time of
grant, more than 10% of the total combined voting power of all classes of
the Company's common stock, the exercise price of such option shall be at
least 110% of the fair market value of the common stock on the date of
grant and the term of the option shall not exceed five years from the
date of grant. The purchase price of shares subject to non-qualified
stock options shall be determined by a committee established by the Board
of Directors with the condition that such prices shall not be less than
85% of the fair market value of the common stock at the time of grant.
63
<PAGE>
Magnitude Information Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
STOCK OPTION PLANS - (Continued)
Qualified and Non-Qualified
Shares Under Option December 31,
----------------------------------
---------------
1999 1998
--------------- ---------------
<S> <C> <C>
Outstanding, beginning of year 981,468 586,144
Granted during the year 605,000 501,162
Forfeited during the year (791,468) (105,838)
=============== ===============
Outstanding, end of year (at prices ranging from $1.00 to $4.50 795,000 981,468
per share)
=============== ===============
Eligible, end of year for exercise (at prices ranging from $1.00 to 470,000 292,597
$4.50 per share)
=============== ===============
</TABLE>
At December 31, 1999 and 1998, the weighted average exercise price and
weighted average remaining contractual life is $1.13 and $2.56 per share
and 4 years 9 months and 5 years 4 months, respectively.
At December 31, 1999, there were 343,424 shares reserved for future grants.
WARRANTS
The Company issued common stock purchase warrants as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------
Exercise
Date of Grant No. of Price Per Exercise Term Vesting Rights
Shares Share
Start Expiration
<S> <C> <C> <C> <C> <C> <C>
May 1, 1997 10,000 $ 5.00 May 1, 1997 April 30, 2000 Upon Issue
May 1, 1998 224,000 5.00 May 1, 1998 April 30, 2003 Upon Issue
June 10, 1999 200,000 1.00 June 10, 1999 June 10, 2003 Upon Issue
June 21, 1999 200,000 1.00 June 21, 1999 June 21, 2003 Upon Issue
June 23, 1999 300,000 1.00 June 23, 1999 June 23, 2003 Upon Issue
June 25, 1999 200,000 1.00 June 25, 1999 June 25, 2003 Upon Issue
July 13, 1999 100,000 1.00 July 13, 1999 July 13, 2003 Upon Issue
July 20, 1999 100,000 1.00 July 20, 1999 July 20, 2003 Upon Issue
July 22, 1999 150,000 1.00 July 22, 1999 July 22, 2002 Upon Issue
July 28, 1999 150,000 1.00 July 28, 1999 July 28, 2006 Upon Issue
August 19, 1999 100,000 1.00 August 19, 1999 October 4, 2003 Upon Issue
August 30, 1999 100,000 1.00 August 30, 1999 October 4, 2003 Upon Issue
September 7, 1999 100,000 1.00 September 7, 1999 October 4, 2003 Upon Issue
September 21, 1999 50,000 1.00 September 21, 1999 October 4, 2003 Upon Issue
October 4, 1999 50,000 1.00 October 4, 1999 October 4, 2003 Upon Issue
October 8, 1999 400,000 1.00 October 8, 1999 October 8, 2004 Upon Issue
November 8, 1999 50,000 1.00 November 8, 1999 November 8, 2003 Upon Issue
November 16, 1999 100,000 1.00 November 16, 1999 November 16, 2003 Upon Issue
November 20, 1999 100,000 1.00 November 20, 1999 November 20, 2003 Upon Issue
December 28, 1999 100,000 1.00 December 28, 1999 December 28, 2004 Upon Issue
December 30, 1999 602,332 1.00 December 30, 1999 December 30, 2004 Upon Issue
</TABLE>
At December 31, 1999, there were 3,386,332 shares eligible for exercise at
prices ranging from $1.00 to $5.00 per share, of which 1,600,000 eligible
shares are callable at $2.00 per share.
64
<PAGE>
Magnitude Information Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
COMMITMENTS AND CONTINGENCIES
Lease Agreement
Magnitude, Inc. leases its administrative offices pursuant to a lease
agreement dated December 9, 1998. Such lease commenced December 16,
1998 and expires on December 31, 2001 and requires monthly payments of
$3,700 from December 16, 1998 to October 31, 1999 and $3,250 from
November 1, 1999 to December 31, 2001. Under the lease agreement,
Magnitude, Inc. is required to make future minimum lease payments as
follows in addition to a pro-rata share of certain operating expenses:
Year Ending December 31,
2000 $ 39,000
2001 39,000
---------------
Total $ 78,000
===============
In March 2000, the Company entered into a five year lease agreement and
will be relocating its administrative offices. The Company is
attempting to identify a subtenant with respect to its existing lease
obligation. The new lease payment will be $6,500 payable monthly with
nominal increases to the base rent in years three through five.
Included in general and administrative expenses is rent expense which
amounted to $64,125 and $103,580 for the years ended December 31, 1999
and 1998, respectively.
Licensing Agreement
On August 29, 1997, the Company signed a letter of intent to acquire
Cornell Ergonomics ("Cornell") a software developer of a unique
ergonomic assessment tool. This agreement was subsequently revised on
December 1, 1997 through a Software Distribution and Option Agreement
whereby the Company obtained a two-year exclusive license to distribute
and sub-license a certain software product. The Company also has the
exclusive right, under certain circumstances, to purchase either the
assets of Cornell or all of the issued and outstanding capital stock of
Cornell. In January 2000 the Company purchased all of the issued and
outstanding capital stock of Cornell.
Employment Agreements
The Company has entered into employment agreements with certain key
personnel which provide for a base salary, yearly bonuses in common
stock and/or options of the Company and other benefits. Termination of
the agreements may be made by either party with advance notice.
RELATED PARTY TRANSACTIONS
In November 1998, the Company entered into a consulting agreement with
an individual who subsequently, in January 1999, joined the Company's
board of directors, and pursuant to which the Company issued 1,000,000
shares of common stock. Such shares were registered on Form S-8 on
December 22, 1998. During the first quarter of 1999, this individual,
pursuant to the consulting agreement, obtained the release of
approximately $436,000 of the Company's liabilities.
Between December 30, 1998, and March 31, 1999, a director and principal
shareholder extended working capital loans aggregating $395,560 to the
Company, of which a portion of $351,060 was the subject of a promissory
note bearing interest at the rate of 10% per annum During the same
time, this director and shareholder exercised options to purchase
450,000 shares of the common stock of the Company, and was issued an
additional 565,000 shares, against a combination of cash payments and
cancellation of debt owed by the Company in the aggregate amount of
$507,500.
65
<PAGE>
Magnitude Information Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
MAJOR CUSTOMERS
For the year ended December 31, 1998, the Company had a major customer,
sales of hardware products to which represented approximately 38% of the
Company's revenues. The Company had an accounts receivable balance due
from this customer of $35,730 at December 31, 1998. With the sale of the
hardware product line, the Company's business is now focused exclusively
on the further development and marketing of these software products. As
such, the Company currently must be considered an enterprise in
transition, because it has not yet realized material revenues from
licensing its software.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash, accounts receivable, accounts payable, accrued expenses, notes
payable, long-term debt and capitalized lease obligations:
The carrying amount approximates fair value because of the short term
maturity of these instruments.
Limitations
Fair value estimates are made at a specific point in time, based on
relevant information and information about the financial instrument.
These estimates are subjective in nature and involve uncertainties
and matters of significant judgment and therefore cannot be
determined with precision. Changes in assumptions could significantly
affect the estimates.
SUBSEQUENT EVENTS
Changes in Key Personnel
In January 1999, the Chairman of the Board of Directors resigned. In
connection with this individual's resignation, $350,000 of the $900,000
principal amount cumulative preferred shares held by this individual
were exchanged for 700,000 shares of common stock of the Company. The
remaining principal balance of $550,000 along with a promissory note
totalling $351,060 were exchanged for a $900,000 principal amount of a
new series of convertible preferred shares which have rights of 7% per
annum dividend payments to be made monthly. In connection with a
termination agreement dated January 28, 2000 a restrictive covenant and
confidentiality agreement was executed whereby the Company agreed to
pay this individual a monthly fee in the amount of $5,555 over the 36
month term of that agreement along with this individual's health and
term life insurance for an 18 month period.
Conversion of Debt
As of March 24, 2000, the Company converted approximately $1,643,235 of
debt into 2,777,116 common shares and 90,287 preferred shares of the
Company.
Equity Placements
As of March 24, 2000, the Company had received $200,000 pursuant to
private equity placements under which 400,000 shares of common stock
was issued. In addition the Company received $1,990,900 pursuant to a
firm commitment equity financing transaction under which shares of
common stock and a new series of convertible preferred shares with
detachable common stock purchase warrants will be issued.
66
<PAGE>
Magnitude Information Systems, Inc. and Subsidiaries
(formerly Proformix Systems, Inc. and Subsidiaries)
Index to the Consolidated Financial Statements
December 31, 1998
Page
Independent Auditors' Report.............................. 86
Financial Statements
Consolidated Balance Sheet................................ 88
Consolidated Statements of Operations..................... 89
Consolidated Statement of Stockholders Equity (Deficit)... 90-91
Consolidated Statements of Cash Flows..................... 92-93
Notes to the Consolidated Financial Statements............ 94-107
67
<PAGE>
Letterhead of
Rosenberg Rich Baker Berman & Company
380 Foothill Road
Bridgewater, New Jersey 08807
Independent Auditors' Report
To the Board of Directors and Stockholders of Magnitude Information Systems,
Inc. and Subsidiaries (formerly Proformix Systems, Inc and Subsidiaries)
We have audited the accompanying consolidated balance sheet of Magnitude
Information Systems, Inc. and Subsidiaries as of December 31, 1998 and the
related consolidated statements of operations, stockholders' equity (deficit),
and cash flows for the two years ended December 31, 1998 and 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Magnitude
Information Systems, Inc. and Subsidiaries as of December 31, 1998 and the
consolidated results of their operations and their cash flows for the years
ended December 31, 1998 and 1997, in conformity with generally accepted
accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in the Notes to
the Consolidated Financial Statements, as of December 31, 1998, the Company has
a negative working capital position and has experienced net losses and negative
cash flows from operations. These factors raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are described in the notes to the financial statements. The
consolidated financial statements do not include ant adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts or
classifications of liabilities that might be necessary should the Company be
unable to continue in operation.
/s/ Rosenberg Rich Baker Berman & Company
Bridgewater, New Jersey
April 7, 1999
68
<PAGE>
Magnitude Information Systems, Inc. and Subsidiaries
(formerly Proformix Systems, Inc. and Subsidiaries)
Consolidated Balance Sheet
December 31, 1998
<TABLE>
<CAPTION>
Assets
Current Assets
<S> <C>
Cash $ 9,403
Accounts receivable net of allowance for doubtful accounts of $109,421 109,249
Inventories 26,789
Miscellaneous receivables 54,743
Prepaid expenses 385,608
--------------
Total Current Assets 585,792
Property, plant and equipment 148,283
Investment in Input Technologies - at cost 60,000
Software, net of accumulated amortization of $116,123 1,339,267
Other assets 5,111
==============
Total Assets 2,138,453
==============
Liabilities and Stockholders' Equity (Deficit)
Current Liabilities
Accounts payable and accrued expenses 1,673,742
Dividends payable 9,000
Loans payable 369,730
Current maturities of notes payable 550,000
Current maturities of long-term debt 195,010
Current maturities of capitalized lease obligations 15,826
--------------
Total Current Liabilities 2,813,308
Notes payable, less current portion 1,025,000
Long term debt, less current portion 262,000
Obligations under capital leases, excluding current maturities 29,839
--------------
Total Liabilities 4,130,147
--------------
-
Minority Interest
Stockholders' Equity (Deficit)
Preferred stock Series A, $.01 par value, authorized 3,000,000 shares; issued and -
outstanding, 0 shares
Cumulative preferred stock, $.001 par value; 2,500 shares authorized, 10 shares -
issued and outstanding
Common stock, $.0001 par value, 30,000,000 shares authorized; 6,431,113 shares issued 643
and outstanding
Contributed capital 81,000
Additional paid in capital 6,832,728
Accumulated deficit (8,906,065)
--------------
Total Stockholders' Equity (Deficit) (1,991,694)
--------------
Total Liabilities and Stockholders' Equity (Deficit) 2,138,453
==============
</TABLE>
See notes to the consolidated financial statements.
69
<PAGE>
Magnitude Information Systems, Inc. and Subsidiaries
(formerly Proformix Systems, Inc. and Subsidiaries)
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1998 1997
--------------- --------------
<S> <C> <C>
Net Sales $ 2,926,455 $ 3,125,009
Cost of goods sold 1,590,440 1,451,204
--------------- --------------
Gross Profit 1,336,015 1,673,805
Selling, general and administrative expenses 3,924,777 2,801,975
--------------- --------------
(Loss) From Operations (2,588,762) (1,128,170)
--------------- --------------
Other Income (Expense)
Miscellaneous income 86,872 90,977
Interest income 1,384 -
Lawsuit settlement (10,000) -
Miscellaneous expense (172,385) -
Interest expense (343,394) (338,038)
Loss on disposition of assets (104,336) (132,514)
--------------- --------------
Total Other (Expense) (541,859) (379,575)
--------------- --------------
(Loss) From Continuing Operations Before Provision for Income Taxes (3,130,621) (1,507,745)
Provision for Income Taxes - -
--------------- --------------
(Loss) From Continuing Operations (3,130,621) (1,507,745)
Discontinued Operations
Gain on disposal of hardware line of business (net of $0 income tax effect) 599,712 -
=============== ==============
Net (Loss) $ (2,530,909) $ (1,507,745)
=============== ==============
Net (Loss) Per Common Share:
(Loss) From Continuing Operations $ (.72) $ (.76)
Discontinued Operations .14 -
--------------- --------------
Net (Loss) $ (.58) $ (.76)
=============== ==============
Weighted Average of Common Shares Outstanding 4,324,292 2,094,724
=============== ==============
</TABLE>
See notes to the consolidated financialstatements.
70
<PAGE>
Magnitude Information Systems, Inc. and Subsidiaries (formerly Proformix
Systems, Inc. and Subsidiaries) Consolidated Statement of Stockholders'
Equity (Deficit) for the Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
Convertible Cumulative
Preferred Shares Preferred Shares Common Stock
Shares Amount Shares Amount Shares Amount
-------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1997 - $ - 10 $ - 3,417,655 $ 3,418
Dividends on cumulative preferred shares - - - - - -
Dividends on cumulative preferred shares waived - - - - - -
Issuances of common stock for services performed - - - - 1,210,000 1,210
Issuances of common stock pursuant to stock - - - - 701,343 702
option exercise per consulting agreement
Issuance of common stock for conversion of - - - - 281,539 282
accrued interest on private placement notes
Issuance of common stock pursuant to - - - - 2,900,000 2,900
cons.agreement
Subtotal - Magnitude, Inc. - - 10 - 8,510,537 8,512
Exchange of Magnitude, Inc. preferred stock for - - (10) - - -
preferred stock of the Company
Recapitalization pursuant to reverse acquisition: - - - - - -
Exchange of Magnitude, Inc. common shares 3.4676 - - - - (8,266,757) (8,267)
to 1 common share of the Company
Magnitude, Inc. common shares not tendered and
accounted for as a minority interest - - - - (243,780) (245)
Subtotal - Magnitude, Inc. - - - - - -
Opening common and preferred stock of the Company - - 35,036 - 43,064 4
prior to the exchange with Magnitude, Inc.
Cancelation of the Company's preferred stock - - (35,036) - - -
Issuance of common stock to Royal Capital, Inc. - - - - 313,600 32
Fractional shares canceled - - - - (18) -
Exchange of the Company's common stock, one common
share for 3.4676 common shares of Magnitude, Inc. - - - - 2,384,000 238
Exchange of the Company's preferred stock for - - 10 - - -
preferred stock of Magnitude, Inc.
Subtotal - the Company - - 10 - 2,740,646 274
Issuance of common stock to President pursuant to grant - - - - 60,000 6
Issuance of common stock to domestic private - - - - 28,611 3
individuals pursuant to an exemption under Rule 506
Issuance of common stock to foreign - - - - 69,250 7
investors pursuant to Reg. S.
Net loss, year ended December 31, 1997 - - - - - -
Balances, December 31, 1997 - $ - 10 $ - 2,898,507 $ 290
======== ========== ========= ========= ============ =========
</TABLE>
See notes to the consolidated financial statements.
71A
<PAGE>
Magnitude Information Systems, Inc. and Subsidiaries (formerly Proformix
Systems, Inc. and Subsidiaries) Consolidated Statement of Stockholders'
Equity (Deficit) for the Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
Total
Additional Stockholders'
Contributed Paid in Accumulated Equity
Capital Capital Deficit (Deficit)
--------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C>
Balances, January 1, 1997 162,000 $ 1,361,108 $ (4,957,411) $ (3,430,885)
Dividends on cumulative preferred shares - - (9,000) (9,000)
Dividends on cumulative preferred shares waived 81,000 - (81,000) -
Issuances of common stock for services performed - 44,790 - 46,000
Issuances of common stock pursuant to stock - 216,636 - 217,338
option exercise per consulting agreement
Issuance of common stock for conversion of - 281,250 - 281,532
accrued interest on private placement notes
Issuance of common stock pursuant to - (2,900) - -
cons.agreement
Subtotal - Magnitude, Inc. 243,000 1,900,884 (5,047,411) (2,895,015)
Exchange of Magnitude, Inc. preferred stock for - - - -
preferred stock of the Company
Recapitalization pursuant to reverse acquisition: - - - -
Exchange of Magnitude, Inc. common shares 3.4676 - 8,267 - -
to 1 common share of the Company
Magnitude, Inc. common shares not tendered and
accounted for as a minority interest - 245 - -
Subtotal - Magnitude, Inc. 243,000 1,909,396 (5,047,411) (2,895,015)
Opening common and preferred stock of the Company - (4) - -
prior to the exchange with Magnitude, Inc.
Cancelation of the Company's preferred stock - - - -
Issuance of common stock to Royal Capital, Inc. - (32) - -
Fractional shares canceled - - - -
Exchange of the Company's common stock, one common
share for 3.4676 common shares of Magnitude, Inc. - (238) - -
Exchange of the Company's preferred stock for - - - -
preferred stock of Magnitude, Inc.
Subtotal - the Company
Issuance of common stock to President pursuant to grant 243,000 1,909,396 (5,047,411) (2,895,015)
Issuance of common stock to domestic private - (6) - -
individuals pursuant to an exemption under Rule 506 - 128,747 - 128,747
Issuance of common stock to foreign - 276,993 - 277,000
investors pursuant to Reg. S.
Net loss, year ended December 31, 1997 - - (1,507,745) (1,507,745)
Balances, December 31, 1997 $ 243,000 $ 2,314,856 $ (6,555,156) $ (3,997,010)
========= ============ ============ ==============
</TABLE>
See notes to the consolidated financial statements.
71B
<PAGE>
Magnitude Information Systems, Inc. and Subsidiaries
(formerly Proformix Systems, Inc. and Subsidiaries)
Consolidated Statement of Stockholders' Equity (Deficit)
Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
Convertible Cumulative
Preferred Shares Preferred Shares Common Stock
Shares Amount Shares Amount Shares Amount
-------- ------ ------ ------ ------ ------
<S> <C> <C> <C><C> <C> <C>
Balances, January 1, 1998 - $ - 10 $ - 2,898,507 $ 290
Accrued Dividends on cumulative preferred shares - - - - - -
reversed
Dividends on cumulative preferred shares waiver - - - - - -
reversed
Issuances of common stock to domestic private - - - - 79,722 8
individuals pursuant to an exemption under Rule 506
Issuances of common stock to foreign investors - - - - 1,453,644 145
pursuant to Reg. S.
Exchange of the Company's common stock, one common - - - - 22,061 2
share for 3.4676 common shares of Magnitude, Inc.
Issuance of common stock for conversion of accrued - - - - 10,411 1
interest on private placement notes
Issuance of common stock in exchange for prepaid - - - - 150,000 15
advertising
Issuance of common stock pursuant to Rolina - - - - 155,556 16
Corporation merger
Issuance of common stock pursuant to Vanity Software - - - - 224,000 22
Publishing Corporation acquisition
Issuance of common stock granted for services performed - - - - 1,080,177 108
Issuance of common stock for conversion of loan and - - - - 342,000 34
accrued interest
Issuance of common stock pursuant to sales incentive - - - - 5,035 1
awards
Issuance of common stock in exchange for product rights - - - - 10,000 1
- - - - - -
Net loss, year ended December 31, 1998
- $ - 10 $ - 6,431,113 $ 643
Balances, December 31, 1998
========= ========= ======= ========= ========== ========
</TABLE>
See notes to the consolidated financialstatements.
72A
<PAGE>
Magnitude Information Systems, Inc. and Subsidiaries (formerly Proformix
Systems, Inc. and Subsidiaries) Consolidated Statement of Stockholders'
Equity (Deficit) for the Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
Total
Additional Stockholders'
Contributed Paid in Accumulated Equity
Capital Capital Deficit (Deficit)
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
$ 243,000 $ 2,314,856 $ (6,555,156) $ (3,997,010)
Balances, January 1, 1998
Accrued Dividends on cumulative preferred shares - - 18,000 18,000
reversed
Dividends on cumulative preferred shares waiver (162,000) - 162,000 -
reversed
Issuances of common stock to domestic private - 199,992 - 200,000
individuals pursuant to an exemption under Rule 506
Issuances of common stock to foreign investors - 2,586,855 - 2,587,000
pursuant to Reg. S.
Exchange of the Company's common stock, one common - (2) - -
share for 3.4676 common shares of Magnitude, Inc.
Issuance of common stock for conversion of accrued - 36,101 - 36,102
interest on private placement notes
Issuance of common stock in exchange for prepaid - 374,985 - 375,000
advertising
Issuance of common stock pursuant to Rolina - 388,874 - 388,890
Corporation merger
Issuance of common stock pursuant to Vanity Software - 559,978 - 560,000
Publishing Corporation acquisition
Issuance of common stock granted for services performed - 29,892 - 30,000
Issuance of common stock for conversion of loan and - 341,199 - 341,233
accrued interest
Issuance of common stock pursuant to sales incentive - (1) - -
awards
Issuance of common stock in exchange for product rights - (1) - -
- - (2,530,909) (2,530,909)
Net loss, year ended December 31, 1998
$ 81,000 $ 6,832,728 $ (8,906,065) $ (1,991,694)
Balances, December 31, 1998
============= ============ ============== ==============
</TABLE>
See notes to the consolidated financialstatements.
72B
<PAGE>
Magnitude Information Systems, Inc. and Subsidiaries
(formerly Proformix Systems, Inc. and Subsidiaries)
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1998 1997
----------------- -----------------
Cash Flows From Operating Activities
<S> <C> <C>
Net Income (Loss) $ (2,530,909) $ (1,507,745)
Adjustments to Reconcile Net (Loss) to Net Cash (Used) by Operating
Activities
Depreciation and amortization 266,589 268,155
Loss on disposition of assets 112,112 132,514
Bad debt provision 94,287 370
Forgiveness of debt (32,893) 90,977
Inventory variance 132,890 -
Return reserve provision 30,000 -
Decreases (Increases) in Assets
Accounts receivable 50,956 144,674
Miscellaneous receivables (54,743) -
Inventories (317,650) 11,139
Prepaid expenses 36,996 11,337
Other assets 414 (1,127)
Increases (Decreases) in Liabilities
Accounts payable and accrued expenses 403,405 170,117
Trade acceptance payable (44,860) 44,860
Advances payable - 275,000
----------------- -----------------
Net Cash (Used) by Operating Activities (1,853,406) (359,729)
----------------- -----------------
Cash Flows From Investing Activities
Purchases of equipment, fixtures, and software (569,857) (56,372)
Sales of property and equipment 716,926 -
----------------- -----------------
Net Cash Provided (Used) by Investing Activities 147,069 (56,372)
----------------- -----------------
Cash Flows From Financing Activities
Repayment of notes payable (25,000) -
Proceeds from long-term debt 342,000 -
Repayment of long-term debt (750,577) (148,950)
Repayment of capital lease obligations (7,229) (7,660)
Repayment of officer loans payable (85,000) (30,000)
Proceeds from loans payable - 25,000
Repayment of loans payable (275,000) (25,000)
Proceeds from issuance of common stock 2,512,000 605,750
----------------- -----------------
Net Cash Provided by Financing Activities 1,711,194 419,140
----------------- -----------------
Net increase in Cash 4,857 3,039
Cash at beginning of period 4,546 1,507
----------------- -----------------
Cash at end of period $ 9,403 $ 4,546
================= =================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest Paid $ 245,916 $ 142,875
================= =================
Taxes Paid $ 4,320 $ 425
================= =================
</TABLE>
See notes to the consolidated financial statements.
73
<PAGE>
Magnitude Information Systems, Inc. and Subsidiaries
(formerly Proformix Systems, Inc. and Subsidiaries)
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1998 1997
------------ ----------------
Schedule of non-cash financing activities
Inconnection with the retirement of $36,102 of accrued interest on a
promissory note, 10,411 common shares were issued
<S> <C> <C>
$ 36,102 $ -
============ ================
Capitalized lease obligations incurred for use of equipment
$ 26,376 $ -
============ ================
Inconnection with the acquisition of a 20% equity interest in Input
Technologies LLC, $60,000 of accounts receivable were written off
$ 60,000 $ -
============ ================
In connection with the Rolina Corporation merger, secured
payment obligation incurred
$ 100,000 $ -
============
================
Inconnection with the issuance of common stock, 281,539 Magnitude,
Inc. shareswere issued as consideration for accrued interest on
$1,175,000 of private placement notes
$ $ 281,539
============ ================
Promissory note issued in connection with retirement of other
promissory notesand the repayment of a past due subordinated
debenture
$ $ 316,849
============ ================
In connection with the issuance of common stock, 75,000 Magnitude,
Inc. shares were issued as consideration for past services
$ $ 46,000
================
============
In connection with a stock option exercise, 34,676 Magnitude, Inc. shares
were issued in connection with a reduction in accrued expenses
$ $ 17,338
============ ================
In connection with the obtaining of prepaid advertising, 150,000 common
shares were issued
$ 375,000 $
============ ================
In connection with the Rolina Corporation merger, 155,556 common shares
were ssued
$ 388,890 $
============ ================
Inconnection with the Vanity Software Publishing Corporation
acquisition, 224,000 common shares were issued
$ 560,000 $
============ ================
Inconnection with the issuance of common stock, 72,677 shares were
issued as consideration for past services
$ 30,000 $
============ ================
Inconnection with the retirement of a $316,849 promissory note and
accrued interest thereon, 342,000 common shares were issued
$ 341,233 $
============ ================
</TABLE>
See notes to the consolidated financial statements.
74
<PAGE>
Magnitude Information Systems, Inc. and Subsidiaries
(formerly Proformix Systems, Inc. and Subsidiaries)
Notes to the Consolidated Financial Statements
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Organization
Magnitude Information Systems, Inc. (the "Company" or "Magnitude") was
incorporated as a Delaware corporation on April 19, 1988 under the name
Fortunistics Inc. On March 4, 1993, the Company changed its name to
Whitestone Industries, Inc. On July 14, 1997, the Company changed its
name to Proformix Systems, Inc., and on November 18, 1998, the Company
changed its name to Magnitude Information Systems, Inc.
On June 16, 1997, Royal Capital, Inc. ("Royal"), a New Jersey
Corporation, entered into an agreement with the Company, then known as
Whitestone Industries, Inc., and its then president, whereby Royal (i)
acquired 100,000 shares of the Company's preferred stock held by the
President and (ii) acquired the voting proxy of 1,120,000 (pre-split)
shares of common stock. The consideration paid to the President was
$100,000. Thus, Royal obtained a voting majority of the Company's
capital stock.
On June 24, 1997, the Company, Royal, and Proformix, Inc., a company
incorporated in the State of Delaware in October 1991, entered into an
acquisition agreement as a consequence of which the Company on July 2,
1997, submitted a stock exchange offer to the shareholders of
Proformix, Inc. Proformix, Inc. in November, 1998 changed its name to
Magnitude, Inc. and is hereafter referred to as Magnitude, Inc. In
order to enter into the aforesaid agreement, the Company's then Board
of Directors authorized a 137: 1 reverse split of its outstanding
shares of common stock, and spun off the shares of its wholly owned
subsidiary Golden Bear Entertainment Corporation to its then current
shareholders in the form of a stock dividend. This distribution
effectively eliminated all assets and liabilities from the books of the
Company prior to the acquisition of Magnitude, Inc.
The exchange offer to the Magnitude, Inc. shareholders gave them the
choice to exchange their shares of the common stock in Magnitude, Inc.
into newly to be issued common stock of Whitestone at the rate of
3.4676 shares of Magnitude, Inc. common stock to 1 share of Whitestone
common stock, and to holders of Magnitude Cumulative Preferred Stock,
to exchange their shares into newly to be issued Cumulative Preferred
Stock of Whitestone at the rate of 1 to 1. The exchange transaction
resulted in the former Magnitude, Inc. shareholders owning
approximately 90% of the combined entity. Holders of approximately 98%
of Magnitude, Inc. common stock have agreed to the stock exchange and
tendered their common shares in exchange for Whitestone common shares.
The remaining 2% of Magnitude, Inc. stockholders hold a minority
interest which is valued at $0.
For accounting purposes, the acquisition has been treated as an
acquisition of Whitestone by Magnitude, Inc. and a recapitalization of
Magnitude, Inc. The historical financial statements prior to July 2,
1997 are those of Magnitude, Inc. Proforma information is not presented
since the combination is considered a recapitalization. Subsequent to
the exchange, the Company and Magnitude, Inc. remain as two separate
legal entities whereby Magnitude, Inc. operates as a subsidiary of the
Company, however, the operations of the newly combined entity are
currently comprised solely of the operations of Magnitude, Inc.
On February 2, 1998, the Company entered into an Agreement and Plan of
Merger with Rolina Corporation, a privately held New Jersey software
developing firm, and on April 30, 1998, into an Asset Purchase
Agreement with Vanity Software Publishing Co., a Canadian developer of
specialized software, whereby the Company, in return for payments in
form of cash and equity, acquired the rights to certain software
products and related assets, with such software products subsequently
forming the basis for the further development, during the year, of the
Company's proprietary Proformix EMS Software System.
75
<PAGE>
Magnitude Information Systems, Inc. and Subsidiaries
(formerly Proformix Systems, Inc. and Subsidiaries)
Notes to the Consolidated Financial Statements
On November 18, 1998, the Company and its wholly owned subsidiary
Magnitude, Inc. entered into an Asset Purchase Agreement and several
related agreements with 1320236 Ontario Inc. ("OS"), a publicly traded
Canadian designer, manufacturer and distributor of office furniture
based in Holland Landing, Ontario, Canada, pursuant to which OS
acquired Magnitude, Inc.'s hardware product line comprised of the
Company's ergonomic keyboard platform products and accessories, and all
related inventory and production tooling and warehousing assets, and
all intellectual property rights including the Proformix name, against
a cash consideration and on ongoing contingent stream of royalty
payments on OS' sales of the Proformix hardware products. The Company
will continue to market its proprietary software under the Proformix
label. The Agreement with OS also provided for the retirement of the
Company's then existing bank debt, out of the proceeds of the
transaction.
Until November 18, 1998, when the Company sold its hardware product
line comprised of Magnitude, Inc.'sergonomic keyboard platform products
and accessories, its business was primarily centered around the design,
development, manufacture, and marketing of research-based ergonomic
accessory products for the computerized workplace. In parallel, and
beginning with the February 1998 acquisition by the Company of Rolina
Corporation, an early stage software business which had developed an
ergonomic software product that was being marketed under the name
"ErgoSentry", and the subsequent acquisition in May 1998 of
substantially all of the assets of Vanity Software Publishing
Corporation, a Canadian software firm, which also included a certain
ergonomic software package known as "ErgoBreak", the Company engaged in
the development of a unique suite of software packages designed to
increase productivity in the computer related work environment which
include the before mentioned "ErgoSentry" and "ErgoBreak" products.
These efforts resulted, in November 1998, in the release to the market
of the proprietary "Proformix EMS (Ergonomic Management System)
software system. With the sale of the hardware product line, the
Company's business is now focused exclusively on the further
development and marketing of these software products. As such, the
Company currently must be considered an enterprise in transition,
because it has not yet realized material revenues from licensing its
software.
Magnitude Inc.'s wholly owned subsidiary, Corporate Ergonomic
Solutions, Inc. (Ergonomics) was incorporated in the State of New
Jersey during October 1992. Ergonomics, which commenced operations in
September 1998, was formed primarily to market Proformix's hardware
products which has since been disposed of. Prior to that, its
operations had not been significant.
Going Concern Uncertainty
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As shown in
the consolidated financial statements, the Company has negative working
capital of $2,227,516 as of December 31, 1998. Additionally, the
Company generated net losses from operations of $3,130,621 and
$1,507,745 along with negative cash flows from operations of $1,853,406
and $359,729 for the years ended December 31, 1998 and 1997,
respectively. A large portion of accounts payable and accrued expenses
are either overdue or otherwise beyond original terms. The Company has
negotiated extended payment terms with key suppliers, and entered into
several pay-out agreements with other creditors.
These factors raise substantial doubt about the Company's ability to
continue as a going concern. The financial statements do not include
adjustments relating to the recoverability of assets and classification
of liabilities that might be necessary should the Company be unable to
continue in operation.
The Company's plans to overcome these difficulties, include raising
funding through debt, new equity capital or a combination of both.
Management has provided for bridge funding of which approximately
$500,000 has been subsequently received.
76
<PAGE>
Magnitude Information Systems, Inc. and Subsidiaries
(formerly Proformix Systems, Inc. and Subsidiaries)
Notes to the Consolidated Financial Statements
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
Principles of Consolidation
The consolidated financial statements include the accounts of
Magnitude Information Systems, Inc. and its subsidiaries,
Magnitude, Inc. and Corporate Ergonomic Solutions, Inc. All
significant intercompany balances and transactions have been
eliminated.
Inventories
Inventory consists of finished goods which are stated at the lower of
cost (determined by the first-in, first out method) or market. The sale
of the Company's hardware product line resulted in a loss on disposal
of inventory of $74,736.
Depreciation and Amortization
Property, plant and equipment are recorded at cost. Certain molds were
being depreciated using the units of production method based upon an
estimated useful life of 1,000,000 units. During 1997, the company
changed the estimated useful life of these molds to 300,000 units. The
effect of this change in estimate increased the Company's net loss for
1997 by $169,073. As part of the OS Asset Purchase Agreement, molds
with a remaining net book value of $312,258 and equipment with a
remaining net book value of $6,110 were sold. Depreciation on remaining
equipment, furniture and fixtures and leasehold improvements is
computed on the straight line method over the estimated useful lives of
such assets between 5-10 years. Maintenance and repairs are charged to
operations as incurred.
Hardware
System design costs and software acquisition costs are amortized on a
straight-line basis over an estimated useful life of 10 years. As part
of the OS Asset Purchase Agreement, hardware system design costs with a
remaining net book value of $57,920 were sold. Deferred finance charges
are amortized using the straight line method over a period of 4-5
years. Remaining charges of $19,495 after retirement of the Company's
then existing bank debt as part of the OS Asset Purchase Agreement were
written off.
Securities Issued for Services
The Company accounts for stock options issued for services by reference
to the fair market value of the Company's stock on the date of stock
issuance or option grant. Compensation expense is recorded for the fair
market value of the stock issued, or in the case of options, for the
difference between the stock's fair market value on the date of grant
and the option exercise price.
Securities Issued for Services, Continued
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standard (SFAS) No. 123, "Accounting for Stock-based
Compensation". The statement generally suggests, but does not require,
employee stock-based compensation transactions be accounted for based
on the fair value of the consideration received or the fair value of
the equity instruments issued, whichever is more reliably measurable.
As permitted by the statement, the Company has elected to continue to
follow the requirements of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", which does not require
compensation to be recorded if the consideration to be received is at
least equal to the fair value at the measurement date. The adoption of
SFAS No. 123 does not have a material impact on the financial
statements.
Investment
Investment in Input Technologies LLC is accounted for under the cost
method.
77
<PAGE>
Magnitude Information Systems, Inc. and Subsidiaries
(formerly Proformix Systems, Inc. and Subsidiaries)
Notes to the Consolidated Financial Statements
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
Income Taxes
The Company provides for income taxes based on enacted tax law and
statutory tax rates at which items of income and expenses are expected
to be settled in the Company's income tax return. Certain items of
revenue and expense are reported for Federal income tax purposes in
different periods than for financial reporting purposes, thereby
resulting in deferred income taxes. Deferred taxes are also recognized
for operating losses that are available to offset future taxable
income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized. The Company
has incurred net operating losses for financial-reporting and
tax-reporting purposes. Accordingly, the benefit for income taxes has
been offset entirely by a valuation allowance against the related
deferred tax asset for the year ended December 31, 1998.
Net Loss Per Share
Net loss per share, in accordance with the provisions of Financial
Accounting Standards Board No. 128, "Earnings Per Share", is computed
by dividing net loss by the weighted average number of shares of Common
Stock outstanding during the period. Common Stock equivalents have not
been included in this computation since the effect would be
anti-dilutive.
Revenue Recognition
Revenue from hardware product sales is recognized at the time of
shipment provided that the resulting receivable is deemed probable of
collection. Revenue from software sales is recognized at the time of
licensing provided that the resulting receivable is deemed probable of
collection.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
78
<PAGE>
Magnitude Information Systems, Inc. and Subsidiaries
(formerly Proformix Systems, Inc. and Subsidiaries)
Notes to the Consolidated Financial Statements
CONCENTRATIONS OF BUSINESS AND CREDIT RISK
The Company maintains cash balances in several financial institutions which
are insured by the Federal Deposit Insurance Corporation up to $100,000.
Balances in these accounts may, at times, exceed the federally insured
limits.
The Company provides credit in the normal course of business to customers
located throughout the U.S. The Company performs on going credit
evaluations of its customers and maintains allowances for doubtful accounts
based on factors surrounding the credit risk of specific customers,
historical trends, and other information.
INVENTORIES
Inventories consisted of the following at December 31, 1998:
<TABLE>
<CAPTION>
<S> <C>
Finished goods $ 26,789
---------------
$ 26,789
===============
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following at December 31,
1998:
Equipment $ 195,903
Furniture and fixtures 66,093
Leasehold improvements 45,770
----------------
307,766
Less accumulated depreciation 159,483
----------------
$ 148,283
================
</TABLE>
Depreciation expense charged to operations was $107,928 and $237,189 in
1998 and 1997, respectively.
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following at
December 31, 1998:
Accounts payable $ 782,863
Accrued interest 283,722
Accrued commissions 97,532
Accrued returns 30,000
Accrued legal settlement 20,000
Accrued professional fees 130,000
Deferred royalties 91,531
Accrued payroll 188,014
Miscellaneous accruals 70,080
---------------
$ 1,693,742
===============
79
<PAGE>
Magnitude Information Systems, Inc. and Subsidiaries
(formerly Proformix Systems, Inc. and Subsidiaries)
Notes to the Consolidated Financial Statements
<TABLE>
<CAPTION>
LOANS PAYABLE
Magnitude, Inc. had borrowings under short term loan agreements with the
following terms and conditions at December 31, 1998:
Pursuant to three promissory notes signed throughout 1995 and
1996, an investor advanced Magnitude, Inc. a total of $90,000
<S> <C> <C>
payable upon demand with interest at 12% per annum. $ 90,000
On December 4, 1996, Magnitude, Inc. repurchased 500,000 shares
of its common stock andretired same against issuance of a promissory
note maturing twelve months thereafter accruing interest at
5% per annum and due December 4, 1998. This note is overdue at
December 31, 1998 and no demand for payment has been made through
April 7, 1999 75,000
On December 31, 1998, the Company's board chairman issued a
short-term loan to the Company 80,000
Pursuant to a promissory note dated January 22, 1996, an officer of
the Company advanced the sum of $64,730 which is due upon demand and
accruing interest at the rate of 12% per annum.
24,730
Pursuant to the Rolina Corporation Agreement & Plan of Merger dated
February 2, 1998 the Company was to deliver to Steven D. Rudnik
$ 100,000 eight months from the closing date. Such amount is
overdue and as a result Mr. Rudnik has a lien on certain software
products. 100,000
---------------
Total $ 369,730
===============
</TABLE>
NOTES PAYABLE
Private Placement Offering
During February through June 1995, an underwriter acting as placement
agent offered on behalf of Magnitude, Inc. in a private placement
offering a minimum of five (5) and a maximum of twenty (20) units. The
first 5 units were offered on a "best efforts all or none" basis and
the remaining 15 units on a "best efforts" basis. Each unit consisted
of a $100,000, 12% promissory note and 10,000 shares of Magnitude,
Inc.'s common stock. The promissory notes were originally due on the
earlier of 12 months from their issuance or the completion of a public
or private financing of either debt or equity securities of Magnitude,
Inc. whereby, if such financing was for less than the principal amount
of said notes, then the principal amount of said notes were to be
repaid on a pro-rata basis. These notes were subsequently extended for
an additional 6 months, and further by an additional 9 months. In May
1997 a restructuring agreement caused the reclassification of
$1,175,000 of these notes to long-term debt. These notes were extended
and modified to (i) mature by April 30, 2000, (ii) change from 12% to
8%, (iii) convert all interest accrued until April 30, 1997 into shares
of common stock of Magnitude, Inc. and (iv) paying future interest in
cash an a quarterly basis. Two such notes, however, totaling $200,000
were extended and modified to (1) mature in dates ranging from January
1, 1999 through April 30, 2000, (ii) change from 12% to 8%, (iii)
converted all interest accrued until April 30, 1997 into shares of
common stock, (iv) paying future interest in cash on a quarterly basis,
(v) reverts to 12% for failure to make interest payment when due, with
observance of a two-week cure period, (vi) balance becomes due and
payable immediately for failure to make principal payments when due,
with observance of a two-week cure period, and (vii) balance
convertible into common stock of Magnitude Inc. One of those notes for
$150,000 also grants 10,000 common stock purchase warrants with a
exercise price of $5.00 expiring April 30,2000. The remaining $450,000
of non-restructured notes are included in current liabilities and are
in default as of December 31, 1998.
The private offering was completed in June 1995 resulting in Magnitude,
Inc. selling a total of sixteen (16) units and receiving net proceeds
of $1,364,061 after deducting private placement agent's commission and
legal fees amounting of $235,939. In connection therewith, Magnitude,
Inc. issued 160,000 shares of its $.001 common stock at par. The total
amount of such notes outstanding at December 31, 1998 was $1,575,000,
of which $550,000 is current.
80
<PAGE>
Magnitude Information Systems, Inc. and Subsidiaries
(formerly Proformix Systems, Inc. and Subsidiaries)
Notes to the Financial Statements
<TABLE>
<CAPTION>
LONG-TERM DEBT
Long-term debt as of December 31, 1998 is comprised of the following:
Note to the board chairman, principal due January 15, 2000 accruing interest at a rate of 10%
<S> <C>
per annum. This note is secured by all of Magnitude Inc.'s assets and property $ 262,000
Note to the board chairman of the Company issued in place of accrued royalties, principal due
April 14, 1998 accruing interest at a rate of 5% per annum. This note is overdue and no
demand for payment has been made through April 7, 1999 111,007
Discounted present value of a non-interest bearing $70,000 settlement with a former investor of
Magnitude, Inc. to be paid in 24 equal monthly payments commencing July 1, 1997. The imputed
interest rate used to discount the note is 8% per annum. 33,529
Discounted present value of a non-interest bearing $176,000 settlement with former counsel of
Magnitude, Inc. to be paid in 24 monthly payments commencing September 1, 1997. The imputed
interest rate used to discount the note is 8% per annum. 50,474
--------------
Total 457,010
Less current maturities 195,010
--------------
Long-term debt, net of current maturities $ 262,000
==============
</TABLE>
81
<PAGE>
Magnitude Information Systems, Inc. and Subsidiaries
(formerly Proformix Systems, Inc. and Subsidiaries)
Notes to the Financial Statements
<TABLE>
<CAPTION>
LONG-TERM DEBT, Continued
Total maturities of long-term debt are as follows:
Year Ending December 31,
<S> <C>
1999 $ 195,010
2000 262,000
---------------
$ 457,010
===============
CAPITALIZED LEASE OBLIGATIONS
The Company leases office equipment under non-cancelable capital lease
agreements expiring between January 19, 2001 and October 27, 2002. The
capital lease obligations have been recorded at the present value of
future minimum lease payments, discounted at interest rates of 7.00% to
8.643%. The capitalized cost of equipment at December 31, 1998 amounted
to $32,590 net of accumulated depreciation of $17,014.
The following is a schedule of minimum lease payments due under capital
leases at December 31, 1998:
Year Ending December 31,
1999 $ 19,307
2000 16,456
2001 9,798
2002 6,316
---------------
Total minimum capital lease payments 51,877
Less amounts representing interest 6,212
---------------
Present value of net minimum capital lease payments 45,665
Less current maturities of capital lease obligations 15,826
---------------
Obligations under capital leases, excluding current maturities $ 29,839
===============
</TABLE>
82
<PAGE>
Magnitude Information Systems, Inc. and Subsidiaries
(formerly Proformix Systems, Inc. and Subsidiaries)
Notes to Consolidated Financial Statements
INCOME TAXES
At December 31, 1998, The Company has net operating loss carry forwards
approximating $8,900,000 which expire between the years 2008 and 2013 and
are subject to certain annual limitations.
The Company's total deferred tax asset and valuation allowance at
December 31, 1998 are as follows:
Total deferred tax asset $ 3,560,000
Less valuation allowance 3,560,000
----------------
Net deferred tax asset $ -
401(k) PLAN
The Company adopted the qualified Magnitude, Inc. sponsored 401(k) plan
covering substantially all full time employees under which eligible
employees may elect to contribute, within statutory limits, a percentage
of their annual compensation. The Company matches up to 50% of the
employee's contribution which may not exceed 3% of the employee's total
compensation for the plan year. Contributions to the plan were $16,095
and $17,800 for the years ended December 31, 1998 and 1997, respectively.
STOCK OPTION PLANS
In April 1996, Magnitude, Inc. adopted its 1996 Stock Incentive Plan
("the 1996 Plan"). The 1996 Plan provides that certain options granted
thereunder are intended to qualify as "incentive stock options" (ISO)
within the meaning of Section 422A of the United States Internal Revenue
Code of 1986, while non-qualified options may also be granted under the
Plan. The initial plan and subsequent amendments provided for
authorization of up to 480,000 shares. Pursuant to the above described
stock exchange offer on July 2, 1997, all options under the 1996 Plan
were converted into shares of the Company at a rate of 3.4676 shares of
Magnitude, Inc. to 1 share of the Company.
In September 1997, the Company adopted its 1997 Stock Incentive Plan
("the 1997 Plan"). The 1997 Plan provides that certain options granted
thereunder are intended to qualify as "incentive stock options" (ISO)
within the meaning of Section 422A of the United States Internal Revenue
Code of 1986, while non-qualified options may also be granted under the
Plan. The initial plan and subsequent amendments provided for the grant
of options for up to 1,000,000 shares. The purchase price per share of
common stock deliverable upon exercise of each ISO shall not be less than
100% of the fair market value of the common stock on the date such option
is granted. If an ISO is issued to an individual who owns, at the time of
grant, more than 10% of the total combined voting power of all classes of
the Company's common stock, the exercise price of such option shall be at
least 110% of the fair market value of the common stock on the date of
grant and the term of the option shall not exceed five years from the
date of grant. The purchase price of shares subject to non-qualified
stock options shall be determined by a committee established by the Board
of Directors with the condition that such prices shall not be less than
85% of the fair market value of the common stock at the time of grant.
83
<PAGE>
Magnitude Information Systems, Inc. and Subsidiaries
(formerly Proformix Systems, Inc. and Subsidiaries)
Notes to the Consolidated Financial Statements
STOCK OPTION PLANS (cont.)
<TABLE>
<CAPTION>
Qualified and Non-Qualified
Shares Under Option December 31,
----------------------------------
1998 1997
--------------- ---------------
<S> <C>
Outstanding, beginning of year 586,144 -
Granted during the year 501,162 596,144
Exercised during the year at $1.73 per share - (10,000)
Forfeited during the year (105,838) -
=============== ===============
Outstanding, end of year (at prices ranging from $1.00 to $4.50 per share) 981,468 586,144
=============== ===============
Eligible, end of year for exercise (at prices ranging from $1.00 to
$4.50 per share) 292,597 283,144
=============== ===============
</TABLE>
At December 31, 1998 and 1997, the weighted average exercise price and
weighted average remaining contractual life is $2.56 and $3.36 per share
and 5 years 4 months and 6 years 4 months, respectively.
At December 31, 1998, there were 157,118 shares reserved for future grants.
WARRANTS
<TABLE>
<CAPTION>
The Company issued common stock purchase warrants as follows:
------------------------------------------------------------------------------------------------------------
Exercise Price
No. of Per Exercise Term
----------------------------------------------
Date of Grant Shares Share
Start Expiration Voting Rights
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
May 1, 1997 10,000 $ 5.00 May 1, 1997 April 30, 2000 Upon Issue
--------------------------------------------------------------------------------------------------------------------------------
August 14, 1997 55,929 4.09 August 14, 1997 August 14, 1999 Upon Issue
--------------------------------------------------------------------------------------------------------------------------------
May 1, 1998 224,000 5.00 May 1, 1998 April 30, 2003 Upon Issue
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1998, there were 289,929 shares eligible for exercise at
prices ranging from $4.09 to $5.00 per share.
COMMITMENTS AND CONTINGENCIES
Lease Agreement
Magnitude, Inc. leases its administrative offices pursuant to a lease
agreement dated December 9, 1998. Such lease commences December 16, 1998
and expires on December 31, 2001 and requires monthly payments of $3,700
from December 16, 1998 to October 31, 1999 and $3,250 from November 1,
1999 to December 31,1999. Ergonomics leases office space pursuant to a
lease agreement dated November 1, 1997. Such lease expired November 1,
1998. It is currently leased on a month-to-month basis and requires
monthly payments of $600. Under such lease agreements, Magnitude, Inc. is
required to make future minimum lease payments as follows in addition to
a pro-rata share of certain operating expenses:
Year Ending December 31,
---------------------------------
1999 $ 43,500
2000 39,000
2001 39,000
--------------
Total $ 121,500
==============
Included in general and administrative expenses is rent expense
which amounted to $103,580 and $96,544 for the years ended
December 31, 1998 and 1997, respectively.
84
<PAGE>
Magnitude Information Systems, Inc. and Subsidiaries
(formerly Proformix Systems, Inc. and Subsidiaries)
Notes to the Consolidated Financial Statements
COMMITMENTS AND CONTINGENCIES, Continued
Two lawsuits were instituted against Magnitude, Inc. by a stockholder
of Magnitude, Inc.
One suit asserts that the stockholder had a consulting agreement
with Magnitude, Inc. pursuant to which Magnitude, Inc. had
agreed to pay $125,000 a year for five years and that Magnitude,
Inc. has defaulted in performance of its obligations.
The stockholder has also initiated suit along with other
shareholder members of his family alleging damages because
Magnitude, Inc. acted inconsistent with the best interest of its
stockholders. Other miscellaneous claims were asserted in that
suit.
It is Magnitude, Inc.'s position that both of these suits are
without merit, however, a verbal settlement had been reached with
the plaintiffs in both cases pursuant to which all claims would be
dismissed upon Magnitude, Inc. making six monthly payments totaling
$20,000 commencing November 1, 1998. This potential liability has
been recorded by Magnitude, Inc. No payments have yet been made by
Magnitude, Inc. since it has not received from the plaintiff's
attorneys the necessary settlement documents. The settlement may
also be contingent upon approval by a bankruptcy court since the
stockholder has filed a petition of reorganization.
An additional suit was bought against Magnitude, Inc. by a claimant
for legal fees. The suit was settled upon the agreement by the
Company (guaranteed by an officer of the Company) to pay a total of
$176,000 consisting of an initial payment of $20,000 and the
balance in equal monthly installments of $6,500 each over a period
of 24 months, commencing September 1, 1997. In addition, the
Company and the officer agreed that in the event any payment was in
default, they each would consent to judgement for the total legal
fees demanded of $238,564 less any payments made to that point.
The Company was not in default as of December 31, 1998.
Licensing Agreement
On August 29, 1997, the Company signed a letter of intent to
acquire Cornell Ergonomics ("Cornell") a software developer of a
unique ergonomic assessment tool. This agreement was subsequently
revised on December 1, 1997 through a Software Distribution and
Option Agreement whereby the Company obtained a two-year exclusive
license to distribute and sub-license a certain software product.
The Company also has the exclusive right, under certain
circumstances, to purchase either the assets of Cornell or all of
the issued and outstanding capital stock of Cornell.
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Magnitude Information Systems, Inc. and Subsidiaries
(formerly Proformix Systems, Inc. and Subsidiaries)
Notes to the Consolidated Financial Statements
COMMITMENTS AND CONTINGENCIES, Continued
Employment Agreements
In July of 1997 the Company entered into an employment agreement with
Magnitude, Inc.'s President, to serve as the Company's President and
Chief Executive Officer for a period of five years. Base salary under
the agreement is $108,000 per annum with annual increases determined by
the Board of Directors. The agreement also calls a first year bonus of
140,000 shares of the Company's stock, and 200,000 shares in any year
thereafter in which the Company's after tax net profits exceed
$1,000,000 for each of its first three full fiscal years during the
employment term beginning with calendar year 1998. The agreement was
amended to replace the stock bonuses with nonqualified options to
purchase up to 750,000 shares at a purchase price of $1 and up to
535,000 shares at a price of $.50. Eligibility for benefit programs,
with the exception of any key employee stock option plan, and a fully
paid medical/hospitalization policy is provided under the agreement.
The Company will also provide reimbursement of ordinary and necessary
business expenses and a monthly car allowance. A
noncompetition/nonsolicitation restriction applies for 36 months after
termination of employment. The agreement provides for severance
compensation equal to three months of base salary if employment is
terminated by the Company for cause.
The Vice President and Chief Financial Officer of Magnitude, Inc.
entered into an employment agreement on April 15, 1996. The agreement
is for a term of three years expiring April 14, 1999. Pursuant to the
terms of the agreement, the officer is to receive an annual salary of
$100,000 subject to annual review by the Board of Directors with the
first such review at September 1, 1996, and an annual bonus as
determined by the Board. Pursuant to the agreement, Magnitude, Inc.
would pay the premiums on a $400,000 life insurance policy for the
benefit of individuals designated by the officer. The agreement
restricts the officer from competing with Magnitude, Inc. for a period
of two years after the termination of his employment under certain
circumstances. The agreement provides for severance compensation to be
determined pursuant to a formula established therein to be paid to the
officer if his employment with Magnitude, Inc. is not renewed upon
expiration of the initial or any renewal term thereof, his employment
is terminated by Magnitude, Inc. other than as permitted by the
agreement, or any successor to Magnitude, Inc. after a change of
control or other reorganization of Magnitude, Inc. fails to assume the
agreement.
Consulting Agreements
On May 12, 1997, the Company's subsidiary Magnitude, Inc. entered into
a financial and marketing consulting agreement with Royal Capital, Inc.
("Royal"), whereby Royal would act as a consultant to the company. In
consideration of such services, Royal was granted, in addition to other
consideration, options to purchase 692,122 common shares of the Company
or any succeeding or acquiring entity at exercise prices ranging from
$1.04 to $5.62 per share of the Company. Through December 31, 1998,
options to acquire 192,256 shares of the Company were exercised at a
price of $1.04 per share. Through April 7, 1999, an aggregate of
approximately $2,787,000 in additional equity has been raised pursuant
to Royal's efforts.
On May 12, 1997, the Company's subsidiary Magnitude, Inc. entered into
an agreement with a management consultant. In consideration of such
services, whereby, in addition to other consideration, the consultant
was awarded options equal to 43,258 shares of the Company of which
33,258 remain unexercised at December 31, 1998.
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Magnitude Information Systems, Inc. and Subsidiaries
(formerly Proformix Systems, Inc. and Subsidiaries)
Notes to the Consolidated Financial Statements
RELATED PARTY TRANSACTIONS
During July 1997 one of the Company's board members advanced the
Company $100,000 as evidenced by two 8% promissory notes which were
subsequently agreed to be converted to common shares pursuant to the
filing of an Offering Memorandum offering shares pursuant to an
exemption provided by Rule 504 of Regulation D promulgated under the
Securities Act of 1933, as amended. The Company, however, decided not
to consummate such offering, and instead pursued an offering under Rule
506 of Regulation D promulgated under the Securities Act of 1933 under
which the notes were converted to 22,222 common shares and warrants in
May 1998. During November and December 1997, one investor advanced the
Company $175,000 which was to be used for the purchase of common stock
pursuant to the filing of a Private Placement offering shares to
qualified investors pursuant to an exemption provided by Regulation S
promulgated under the Securities Act of 1933, as amended. On January
26, 1998, 87,500 shares of common stock were issued to this investor.
In November 1998, a director and principal shareholder extended a
working capital loan of $262,000 to the Company, secured by the assets
of the Company, against issuance of a promissory note bearing interest
at the rate of 10% per annum.
In November 1998, the Company entered into a consulting agreement with
an individual who subsequently, in January 1999, joined the Company's
board of directors, and pursuant to which the Company issued 1,000,000
shares of common stock. Such shares were registered on Form S-8 on
December 22, 1998. During the first quarter of 1999, this individual
pursuant to the consulting agreement obtained the release of
approximately $436,000 of the Company's liabilities.
Between December 30, 1998, and March 31, 1999, the director and
principal shareholder extended working capital loans aggregating
$395,560 to the Company, of which a portion of $351,060 was covered by
a promissory note bearing interest at the rate of 10% p.a. During the
same time, this director and shareholder exercised options to purchase
450,000 shares of the common stock of the Company, and was issued an
additional 565,000 shares, against a combination of cash payments and
cancellation of debt owed by the Company, in the aggregate amount of
$507,500.
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Magnitude Information Systems, Inc. and Subsidiaries
(formerly Proformix Systems, Inc. and Subsidiaries)
Notes to the Consolidated Financial Statements
MAJOR CUSTOMERS
For the year ended December 31, 1998, the Company had a major customer,
sales of hardware products to which represented approximately 38% of the
Company's revenues. The Company had an accounts receivable balance due
from this customer of $35,730 at December 31, 1998. With the sale of the
hardware product line, the Company's business is now focused exclusively
on the further development and marketing of these software products. As
such, the Company currently must be considered an enterprise in
transition, because it has not yet realized material revenues from
licensing its software.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash, accounts receivable, accounts payable, accrued expenses, notes
payable, long-term debt and capitalized lease obligations:
The Carrying amount approximates fair value because of the short term
maturity of these instruments.
Limitations:
Fair value estimates are made at a specific point in time, based on
relevant information and information about the financial instrument.
These estimates are subjective in nature and involve uncertainties
and matters of significant judgment and therefore cannot be
determined with precision. Changes in assumptions could significantly
affect the estimates.
SUBSEQUENT EVENTS
Changes in Key Personnel
In January 1999, Steven D. Rudnik was appointed President and CEO of
the Company, taking over the position previously occupied by Jerry
Swon.
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PART II
Information Not Required in the Prospectus
Item 24. Indemnification and Limitation of Liability of Management
As permitted by the Delaware General Corporation Law, Magnitude has
included in its Certificate of Incorporation a provision to eliminate the
personal liability of it's directors for monetary damages for breach or alleged
breach of their fiduciary duties as directors, subject to certain exceptions. In
addition, the Bylaws of Magnitude require the Company to (i) indemnify the
officers and directors under certain circumstances, including those
circumstances in which indemnification would otherwise be discretionary, and
(ii) advance expenses to the officers and directors as incurred in connection
with proceedings against them for which they may be indemnified. Magnitude has
entered into indemnification agreements with the officers and directors
containing provisions that are in some respects broader than the specific
indemnification provisions contained in the Delaware General Corporation Law.
The indemnification agreements may require the companies, among other things, to
indemnify such officers and directors against certain liabilities that may arise
by reason of their status or service as directors or officers (other than
liabilities arising from willful misconduct of a culpable nature), to advance
expenses incurred as a result of any proceeding against them as to which they
may be indemnified, and to obtain directors' and officers' insurance if
available on reasonable terms. Magnitude believes that these charter provisions
and indemnification agreements are necessary to attract and retain qualified
persons as directors and officers.
Magnitude understands that the staff of the Securities and Exchange
Commission is of the opinion that statutory, charter and contractual provisions
as are described above have no effect on claims arising under the federal
securities laws.
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Item 25. Other Expenses of Issuance and Distribution
Magnitude will pay all expenses incident to the offering and sale to
the public of the shares being registered other than any commissions and
discounts of underwriters, dealers or agents and any transfer taxes. Such
expenses are set forth in the following table. All of the amounts shown are
estimates except the Securities and Exchange Commission ("SEC") registration
fee.
SEC registration fee $ 780.00
Legal fees and expenses 65,000.00
Accounting fees and expenses 2,500.00
Printing and Engraving Costs 2,000.00
Transfer Agent Fees 5,000.00
Fees for Qualification of Offering
Under State Blue Sky Laws ----------
Miscellaneous expenses 1,000.00
Total $76,280.00
Item 26. Recent Sales of Unregistered Securities
Fiscal Year 2000
During fiscal year 2000 and through the six month period ended June 30,
2000, the Company placed the following unregistered securities with accredited
or institutional investors:
70,000 shares of Common Stock pursuant to the conversion of $35,000 in
convertible promissory notes, issued in reliance upon exemptions provided under
Section 4(2) of the Securities Act;
27,788 shares of Series B Senior Convertible Preferred Stock to a
foreign investor pursuant to private placement subscriptions under Section 4 (2)
of the Securities Act, which resulted in the receipt by the Company of $250,092
in cash, whereby such shares, among other things, have the following rights and
privileges: (i) 7% annual preferential dividend, payable semi-annually, (ii)
conversion at the holders' option into shares of Common Stock at a conversion
rate of 10 common shares for 1 preferred share. The preferred shares are
callable by the Company under certain terms and conditions.
260,000 shares of Common Stock pursuant to the conversion of an
aggregate $130,000 in convertible promissory notes, issued in reliance upon
exemptions provided under Section 4(2) of the Securities Act;
3,407 shares of Common Stock to one outside consultants and suppliers
for services rendered;
118,000 shares of Common Stock to the principals of two privately held
companies, Internet Ergonomic Technologies, Inc. and Cornell Ergonomics, Inc.,
purchased by the Company in January 2000, which companies owned certain software
assets which have been made part of and integrated into the Company's
proprietary ErgoManager(TM) software system
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100,000 shares to an officer of the Company pursuant to the terms of
his employment agreement;
77,976 shares of Common Stock to three outside consultants and
suppliers for services rendered;
14,445 shares of Common Stock to a director and shareholder of the
Company pursuant to a 1997 transaction approved by the Board of Directors of the
Company;
16,854 shares of Common Stock to an employee in lieu of salary, for
services rendered;
2,120,000 shares of Common Stock pursuant to the conversion of an
aggregate $1,060,000 in convertible promissory notes, issued in reliance upon
exemptions provided under Section 4(2) of the Securities Act;
160,000 shares of Common Stock to seven private investors who had
previously subscribed for certain convertible debt, such shares issued pursuant
to the terms of the pertinent subscription agreement, and in reliance upon
exemptions provided under Section 4(2) of the Securities Act;
400,000 shares of Common Stock to two individual investors pursuant to
private placement subscriptions under Section 4 (2) of the Securities Act, which
resulted in the receipt by the Company of $200,000 in cash;
500,000 shares of Common Stock to three individual foreign investors
pursuant to private placement subscriptions under Section 4 (2) of the
Securities Act, which resulted in the receipt by the Company of $250,000 in
cash;
194,440 shares of Series B Senior Convertible Preferred Stock to five
individual foreign investors pursuant to private placement subscriptions under
Section 4 (2) of the Securities Act, which resulted in the receipt by the
Company of $1,750,000 in cash, whereby such shares, among other things, have the
following rights and privileges: (i) 7% annual preferential dividend, payable
semi-annually, (ii) conversion at the holders' option into shares of Common
Stock at a conversion rate equivalent to $0.90 per share, and (iii) callable by
the Company under certain terms and conditions;
100,000 shares of Series C Senior Convertible Preferred Stock to the
former chairman of the Company pursuant to the terms of a Resignation Agreement
entered into between the Company and this individual, whereby such shares, among
other things, have the following rights and privileges: (i) 7% annual
preferential dividend, payable monthly, (ii) conversion at the holders' option
into 1,000,000 shares of Common, and (iii) callable by the Company under certain
terms and conditions.
Fiscal Year 1999
During fiscal year 1999, the Company placed the following unregistered
securities with accredited and institutional investors:
1,250,332 shares of Common Stock to seven individual foreign investors
pursuant to private placement subscriptions under Section 4(2) of the Securities
Act, which resulted in the receipt by the Company of $625,000 in cash;
60,000 shares of Common Stock to an investor who had previously
subscribed for certain convertible debt, pursuant to the terms of the pertinent
subscription agreement, issued in reliance upon exemptions provided under
Section 4(2) of the Securities Act.
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On September 1, 1999, the Company issued 7,210 shares of its common
stock to a shareholder of Magnitude, Inc., f/k/a Proformix, Inc. in exchange for
his 25,000 shares in Proformix, Inc., pursuant to the terms of the Company's
stock exchange offer of July 2, 1997.
During the second and third quarters of 1999 the Company received an
aggregate $1,225,000 in cash against issuance of convertible promissory notes in
the same aggregate amount, to eight individual accredited private investors
pursuant to transactions under Section 4 (2) of the Securities Act, all of them
maturing at 14 months from date of issuance, convertible at the holders' option
into shares of the common stock of the Company at the rate of $0.50 /share, and
carrying interest at rates between 7% and 12% p.a. A portion of such notes was
accompanied by stock purchase warrants for the purchase of an aggregate
1,450,000 shares at $1 per share, with such warrants being callable by the
Company under certain circumstances, if and when the market price reaches $2 per
share.
565,000 shares of Common Stock to a director and principal shareholder
in exchange against cancellation of promissory notes and interest thereon in the
aggregate value of $282,500;
77,778 shares of Common Stock to the former principal of Rolina
Corporation and current President of the Company, pursuant to a Non-Dilution
clause in the February 2, 1998 Agreement and Plan of Merger with Rolina
Corporation;
54,100 shares of Common Stock to three Magnitude, Inc. consultants
and providers of services to the Company.
Fiscal Year 1998
During fiscal year 1998, the Company placed the following unregistered
securities with accredited and institutional investors:
70,000 shares of Common Stock to a creditor of the Company pursuant to
that party's exercise of an option to convert debt into common stock, at $1.00
per share;
7,500 shares of Common Stock to two individuals who had invested
in the Company pursuant to a 506 Offering Memorandum;
56,000 shares of Common Stock to two outside consultants as
compensation for services rendered;
272,000 shares of Common Stock to a creditor of the Company pursuant to
that party's exercise of an option to convert debt into common;
14,419 shares of Common Stock to Proformix, Inc. shareholders
pursuant to the Company's acquisition of Proformix, Inc. and its subsequent
exchange offer to Proformix, Inc. shareholders. The Company issued these
shares pursuant to Section 4(2) of the Securities Act;
5,035 shares of Common Stock to independent sales representatives and
clients as awards for outstanding sales performance for the Company's products.
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224,000 shares of Common Stock to Vanity Software Publishing
Corporation (see "Acquisition of Vanity Software Publishing Corporation" in the
Notes to Financial Statements included herein). The issuance of the aforesaid
shares was made pursuant to Section 4(2) of the Securities Act;
22,000 shares of Common Stock and warrants to purchase 22,000 shares at
a price of $4.50 per share, to one of the Company's board members in return for
an investment of $100,000 under Rule 506 of Regulation D promulgated under the
Securities Act of 1933, as amended;
70,972 shares of Common Stock to Proformix, Inc. shareholders
pursuant to the Company's acquisition of Proformix, Inc. and its subsequent
exchange offer to Proformix, Inc. shareholders. The Company issued these
shares pursuant to Section 4(2) of the Securities Act;
15,000 shares of Common Stock to an outside consultant as compensation
for services rendered, with an agreement that the Company register such shares
through a Registration Statement on Form S-8.
150,000 shares of Common Stock to an entity which provides a platform
for advertising the Company's products. The Company received as consideration
advertising credits equivalent to $900,000 in retail value. The issuance of the
aforesaid shares was made pursuant to Section 4(2) of the Securities Act;
50,000 shares of Common Stock at a purchase price of $2.00 per share to
an individual pursuant to a private placement under Section 4(2) of the
Securities Act.
100,644 shares of Common Stock to a management consulting firm pursuant
to their exercise of a stock option at $1.7338 per share. The stock option was
granted for services rendered, and the shares were issued pursuant to Section
4(2) of the Securities Act;
887,500 shares of Common Stock issued to foreign entities, thereby
raising $1,550,000 in gross proceeds, pursuant to Regulation S of the Securities
Act;
155,556 shares of Common Stock pursuant to Section 4(2) of the
Securities Act, to the principal of Rolina Corporation in the course of that
entity's acquisition by the Company.
Fiscal Year 1997
During fiscal year 1997, the Company placed the following unregistered
securities with accredited and institutional investors:
Pursuant to an Offering Memorandum dated August 14, 1997, the Company
issued a total of 28,611 shares of Common Stock at a purchase price of $4.50,
and 28,611 warrants for the purchase of Common Stock exercisable at $4.50 per
share, thereby raising $128,750 in gross proceeds. The aforesaid offering of
securities was exempt pursuant to Regulation D of the Securities Act of 1933, as
amended ("Securities Act"), and Rule 506 promulgated thereunder.
26,387 shares of Common Stock to Proformix, Inc. shareholders
pursuant to the Company's acquisition of Proformix, Inc. and its subsequent
exchange offer to Proformix, Inc. shareholders. The Company issued these
shares pursuant to Section 4(2) of the Securities Act;
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465,500 shares of Common Stock issued to foreign entities, thereby
raising $862,000 in gross proceeds, pursuant to Regulation S of the Securities
Act;
In July 1997, the Company issued 173,600 unregistered shares of its
Common Stock to designees of a management consulting firm against a grant of
313,597 shares to this firm for services rendered, pursuant to a resolution of
the Company's Board of Directors of June 16, 1997.
Between July and September 1997, the Company issued an aggregate of
1,143,562 unregistered shares of its Common Stock to holders of common stock of
Proformix, Inc. pursuant to a stock exchange offer extended by the Company on
July 2, 1997.
Between July and October 1997, the Company issued 345,000 unregistered
shares of its Common Stock to designees of a management consulting firm against
a grant of 836,313 shares to this firm pursuant to a consulting agreement of May
8, 1997, and in September 1997 the Company issued 179,600 unregistered shares of
its Common Stock to designees of this consulting firm against an equity
investment of $200,000 made by it in May, 1997.
In September 1997 the Company issued 1,869 unregistered shares of
its Common Stock to a consultant for services rendered.
Item 27. Exhibits Index
The following Exhibits are filed or incorporated by reference into this
Registration Statement:
SEC No. Document
2.2 Agreement and Plan of Merger with Rolina Corporation and Steven D.
Rudnik, and Employment Agreement with Steven D. Rudnik, both of the
date February 2 , 1998, previously filed as Exhibit to the Company's
report on Form 10-KSB for the year ended December 31, 1998 and
incorporated herein by reference.
3(i) Articles of Incorporation and Amendments thereto, incorporated
herein by reference to Exhibits of previous filings with the
Commission.
3(ii) Bylaws of the Company, incorporated herein by reference to
Exhibits of previous filings with the Commission.
4.1* Term Sheet
4.2* Form of Subscription Agreement
4.3* Form of Common Stock Purchase Warrant
4.4* Form of Convertible Promissory Note
4.5* Form of Subscription Agreement
4.6* Form of Convertible Grid Promissory Note
4.7* Form of Common Stock Purchase Warrant
4.8* Form of Convertible Promissory Note
4.9* Form of Common Stock Purchase Warrant
4.10* Loan Agreement with S.Kroll
4.11* Form of Convertible Promissory Note
4.12* Form of Subscription Agreement
4.13* Form of Subscription Agreement
4.14* Form of Subscription Agreement
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4.15* Form of Subscription Agreement 4.16* Form of Subscription Agreement
4.17* Form of Common Stock Purchase Warrant 4.18* Amendment to the Company's
Certificate of Incorporation as filed with the State of Delaware on January 31,
2000, and amended on March 20, 2000, designating a new class of Series B Senior
Convertible Preferred Stock. 4.19* Form of Common Stock Purchase Warrant 4.20+
Amendment to the Company's Certificate of Incorporation as filed with the State
of Delaware on January 31, 2000, and amended on March 20, 2000, designating a
new class of Series C Senior Convertible Preferred Stock 4.21* Agreement with
S.Rudnik, re: convertible debt 4.22* Consulting agreement with G.Shemano 4.23*
Form of Common Stock Purchase Warrant 4.24+ Amendment to the Company's
Certificate of Incorporation as filed with the State of Delaware on January 31,
2000, and amended on March 20, 2000, designating a new class of Series A Senior
Convertible Preferred Stock. 4.25 Common Stock Purchase Agreement, dated October
6, 2000, by and between the Company and Torneaux Fund Ltd. 4.26 Form of Warrant
issuable under the Common Stock Purchase Agreement filed as Exhibit 4.25. 5.1
Legal opinion and consent of Joseph J. Tomasek, Esq. 10.1* Resignation Agreement
dated July 21, 1999, between J. Swon and B. Deichl and the Company, incorporated
herein by reference to the Exhibit of Form S-8 filed with the Commission on
August 3, 1999. 10.2* Resignation Agreement dated January 28, 2000, between M.
Martin and the Company, incorporated herein by reference to the Exhibit of Form
S-8 filed with the Commission on January 31, 2000. 10.3* Employment Agreement,
dated April 15, 1996 between the Company and Joerg Klaube, incorporated herein
by reference and previously filed as an Exhibit to the Company's Form 10-KSB for
the fiscal year ended December 31, 1997 with the Commission. 10.4* Employment
Agreement, dated July 1, 1999 between the Company and John C. Duncan. 23.1
Independent Auditors' Consent 27 Financial Data Schedule
-------
+Documents incorporated by reference to Magnitude's Annual Report filed on Form
10-KSB for the fiscal year ended December 31, 1999 with the Securities and
Exchange Commission on March 30, 2000.
*Previously filed as exhibits to the Company's Registration Statement on
Form SB-2 and Amendments thereto, Commission File No. 333-34512, and
incorporated herein by reference.
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Item 28. Undertakings
A. Undertaking Pursuant to Rule 415
The undersigned Registrant hereby undertakes: (1) To file, during any
period in which offers or sales are being made, a post-effective amendment to
this Registration Statement: (i) to include any prospectus required by Section
10(a)(3) Securities Act of 1933 (the "Securities Act"); (ii) to reflect in the
prospectus any facts or events arising after the effective date of the
Registration Statement (or the most recent post-effective amendment thereof)
which, individually or in the aggregate, represent a fundamental change in the
information set forth in the Registration Statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed with the SEC
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price
represent no more than a 20% change in the maximum aggregate offering price set
forth in the "Calculation of Registration Fee" table in the effective
Registration Statement; (iii) to include any material information with respect
to the plan of distribution not previously disclosed in the Registration
Statement or any material change to such information in the Registration
Statement; (2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof; (3) To remove from registration by means of a
post-effective amendment any of the securities being registered that remain
unsold at the termination of this offering.
B. Undertaking Regarding Filings Incorporating Subsequent Exchange
Act Documents by Reference
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Exchange Act (and, where applicable, each filing of an employee benefit plan's
annual report pursuant to Section 15(d) of the Exchange Act) that is
incorporated by reference in the Registration Statement shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
C. Undertaking In Respect of Indemnification
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the SEC such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
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D. Undertaking Pursuant to Rule 430A
The undersigned Registrant hereby undertakes that: (1) For purposes of
determining any liability under the Securities Act, the information omitted from
the form of the prospectus filed as part of this Registration Statement in
reliance upon Rule 430A and contained in a form of prospectus filed by the
Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act
shall be deemed to be part of this Registration Statement as of the time it was
declared effective. (2) For the purposes of determining any liability under the
Securities Act, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
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Signatures
Pursuant to the requirements of the Securities Act of 1933, the
Registrant, MAGNITUDE INFORMATION SYSTEMS, INC., a corporation organized and
existing under the laws of the State of Delaware, certifies that it has
reasonable grounds to believe that it meets all of the requirements for filing
on Form SB-2 and has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the Town of Chester,
State of New Jersey, on October 27, 2000.
MAGNITUDE INFORMATION SYSTEMS, INC.
By:/s/ Steven D. Rudnik
-----------------------
Steven D. Rudnik,Chairman and Chief Executive Officer
By: /s/ Joerg H. Klaube
-----------------------
Joerg H. Klaube, Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Steven D. Rudnik, his attorneys-in-fact, each
with the power of substitution, for him in any and all capacities, to sign any
amendments to this Registration Statement on Form SB-2, and to file the same,
with exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact, or his substitute or substitutes, may do or
cause to be done by virtue hereof. Pursuant to the requirements of the
Securities Act of 1933, this Registration Statement has been signed by the
following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Steven D. Rudnik President and October 27, 2000
Steven D. Rudnik Chief Executive Officer
(Principal Financial Officer)
/s/ Joerg H Klaube Chief Financial Officer October 27, 2000
Joerg H. Klaube (Principal Financial Officer)
/a/ John C. Duncan President and Chief
John C. Duncan Operating Officer,Director October 27, 2000
/s/ Steven L. Gray Director October 27, 2000
Steven L. Gray
/s/ Ivano Angelastri Director October 27, 2000
Ivano Angelastri
/s/ Joseph J. Tomasek Director October 27, 2000
Joseph J. Tomasek
98
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Exhibit 4.25
COMMON STOCK PURCHASE AGREEMENT
Dated as of October 6, 2000
by and between
MAGNITUDE INFORMATION SYSTEMS, INC.
and
TORNEAUX FUND LTD.
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TABLE OF CONTENTS
<TABLE>
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Page
ARTICLE IDefinitions 1
<S> <C> <C>
Section 1.1 Definitions.....................................................................................1
ARTICLE II Purchase and Sale of Common Stock......................................................................3
Section 2.1 Purchase and Sale of Stock......................................................................3
Section 2.2 The Shares......................................................................................3
Section 2.3 The Warrants....................................................................................3
Section 2.4 Closing.........................................................................................4
ARTICLE III Representations and Warranties........................................................................4
Section 3.1 Representations and Warranties of the Company...................................................4
Section 3.2 Representations, Warranties and Covenants of the Purchaser.....................................11
ARTICLE IV Covenants 13
Section 4.1 Securities.....................................................................................13
Section 4.2 Registration and Listing.......................................................................13
Section 4.3 Registration Statement.........................................................................13
Section 4.4 Compliance with Laws...........................................................................14
Section 4.5 Keeping of Records and Books of Account........................................................14
Section 4.6 Reporting Requirements.........................................................................14
Section 4.7 Other Agreements...............................................................................14
Section 4.8 Non-public Information.........................................................................15
Section 4.9 No Stop Orders.................................................................................15
Section 4.10 Amendments to the Registration Statement.......................................................15
Section 4.11 Prospectus Delivery............................................................................16
Section 4.12 Legends........................................................................................16
ARTICLE V Conditions to Closing, Draw Downs and Warrant Exercise.................................................16
Section 5.1 Conditions Precedent to the Obligation of the Company to Close this Agreement..................16
Section 5.2 Conditions Precedent to the Obligation of the Purchaser to Close this Agreement................17
Section 5.3 Conditions Precedent to the Obligation of the Purchaser to Accept a Draw Down or
Exercise the Warrants and Purchase the Shares..................................................17
ARTICLE VI Draw Down Terms.......................................................................................19
Section 6.1 Draw Down Terms................................................................................19
ARTICLE VIILegends 21
Section 7.1 Legend.........................................................................................21
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Section 7.2 No Other Legend or Stock Transfer Restrictions.................................................22
Section 7.3 Purchaser's Compliance.........................................................................22
ARTICLE VIII Termination.........................................................................................22
Section 8.1 Termination by Mutual Consent..................................................................22
Section 8.2 Other Termination..............................................................................22
Section 8.3 Effect of Termination..........................................................................23
ARTICLE IX Indemnification.......................................................................................23
Section 9.1 General Indemnity..............................................................................23
Section 9.2 Indemnification Procedures.....................................................................24
ARTICLE X Miscellaneous..........................................................................................26
Section 10.1 Fees and Expenses..............................................................................26
Section 10.2 Specific Enforcement, Consent to Jurisdiction..................................................26
Section 10.3 Entire Agreement; Amendment....................................................................26
Section 10.4 Notices........................................................................................27
Section 10.5 Waivers........................................................................................28
Section 10.6 Headings.......................................................................................28
Section 10.7 Successors and Assigns.........................................................................28
Section 10.8 Governing Law..................................................................................28
Section 10.9 Survival.......................................................................................28
Section 10.10 Counterparts...................................................................................28
Section 10.11 Publicity......................................................................................28
Section 10.12 Severability...................................................................................28
Section 10.13 Further Assurances.............................................................................29
Section 10.14 Confidentiality................................................................................29
</TABLE>
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COMMON STOCK PURCHASE AGREEMENT
This COMMON STOCK PURCHASE AGREEMENT (this "Agreement") is dated as of
October 6, 2000 by and between Magnitude Information Systems, Inc., a Delaware
corporation (the "Company") and Torneaux Fund Ltd., a company organized under
the laws of the Commonwealth of The Bahamas (the "Purchaser").
WHEREAS, the parties desire that, upon the terms and subject to the
conditions contained herein, the Company shall issue and sell to the Purchaser,
from time to time as provided herein, and the Purchaser shall purchase, up to
2,386,364 shares of the Company's common stock, par value $0.0001 per share (the
"Common Stock"); and
WHEREAS, such investments will be made in reliance upon the provisions
of Section 4(2) and ("Section 4(2)") and Regulation D ("Regulation D") of the
United States Securities Act of 1933, as amended and the rules and regulations
promulgated thereunder (the "Securities Act"), and/or upon such other exemption
from the registration requirements of the Securities Act as may be available
with respect to any or all of the purchases of Common Stock to be made hereunder
from time to time.
The parties hereto agree as follows:
ARTICLE I
Definitions
Section 1.1 Definitions.
(a) "Alternate Market" shall mean the Nasdaq National Market, the Nasdaq Small
Cap Market, the American Stock Exchange, or the New York Stock Exchange,
whichever is at the time the principal trading exchange or market for the Common
Stock.
(b) "Commission" shall have the meaning assigned to such term in Section 3.1(f)
hereof.
(c) "Commission Documents" shall have the meaning assigned to such term
in Section 3.1(f) hereof.
(d) "Commission Filings" means the Company's Form 10-KSB for the fiscal year
ended December 31, 1999, its Form 10-QSB for the fiscal quarter ended March 31,
2000 and December 31, 1999, its Form 8-Ks dated May 18, 2000, and all other
filings made by the Company after the date hereof pursuant to the Securities
Exchange Act of 1934, as amended (the "Exchange Act").
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(e) "Draw Down" shall have the meaning assigned to such term in Section 6.1(a)
hereof.
(f) "Draw Down Amount" means the actual amount of a Draw Down, with a minimum
amount of $100,000.00 and a maximum amount of $612,500.00.
(g) "Draw Down Discount Percentage" means 88% if the Threshold Price is
equal to or greater than $1.00; provided, however, that for every $0.50
increase of the Threshold Price above $1.00, to a maximum Threshold Price
of $3.50, such draw down discount percentage shall increase by 0.50%,
incrementally, to a maximum of 90.5%.
(h) "Draw Down Exercise Date" shall have the meaning assigned to such
term in Section 5.3 hereof.
(i) "Draw Down Notice" shall have the meaning assigned to such term in
Section 6.1(i) hereof.
(j) "Draw Down Pricing Period" shall mean a period of twenty (20) consecutive
trading days on the over the counter bulletin board ("OTC BB") or an Alternate
Market starting with the first trading day specified in Draw Down Notice (or
such other period of consecutive trading days as mutually agreed upon by the
Company and the Purchaser).
(k) "Material Adverse Effect" shall mean any effect on the business,
results of operations, prospects, properties, assets or financial condition of
the Company that is material and adverse to the Company and its subsidiaries
and affiliates, taken as a whole and/or any condition, circumstance, or
situation that would prohibit or otherwise interfere with the ability of
the Company to enter into and perform any of its obligations under this
Agreement in any material respect.
(l) "Material Change in Ownership" shall mean that, as of any particular
measurement date, the officers and directors of the Company shall beneficially
own in the aggregate less than 2% of the outstanding Common Stock of the
Company, except that for purposes of making any such calculation, Common Stock
issued to the Purchaser pursuant to this Agreement shall not be included in such
calculation.
(m) "Prospectus" as used in this Agreement means the prospectus in the form
included in the Registration Statement, as supplemented from time to time
pursuant to Rule 424(b) of the Securities Act.
(n) "Registration Statement" shall mean the registration statement on Form SB-2,
to be filed with the Securities and Exchange Commission for the registration for
resale of the Shares, as such Registration Statement may be amended from time to
time.
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(o)"Settlement Date" shall have the meaning assigned to such term in Section
6.1(d) hereof.
(p) "Shares" shall mean the shares of Common Stock of the Company that
may be purchased hereunder pursuant to a Draw Down and/or upon exercise of the
Warrants (as defined Section 2.3).
(q) "Threshold Price" is the lowest price at which the Company will set in the
Draw Down Notice in order to sell Shares during each Draw Down Pricing Period,
which Threshold Price may be set in increments of at least $.01.
(r) "VWAP" shall mean the daily volume weighted average price (based on a
trading day from 9:30 a.m. to 4:00 p.m., eastern time) of the Company's Common
Stock on the OTC BB (or any successor thereto) or an Alternate Market as
reported by Bloomberg Financial LP using the AQR function.
ARTICLE II
Purchase and Sale of Common Stock
Section 2.1 Purchase and Sale of Stock. Subject to the terms
and conditions of this Agreement, the Company shall issue and sell to the
Purchaser and the Purchaser shall purchase from the Company (i) up to
2,386,364 shares of Common Stock, based on Draw Downs in accordance with
Section 6.1, and (ii) the Warrants in accordance with Section 2.3 hereof.
In no event shall the amount of Common Stock required to be purchased by the
Purchaser be less than $100,000 or exceed $612,500 per Draw Down during any
Draw Down Pricing Period.
Section 2.2 The Shares. The Company has authorized
and has reserved and covenants to continue to reserve, subject to Section
4.4(b) hereof, free of preemptive rights and other similar contractual rights
of stockholders, 3,579,545 shares of its Common Stock to cover the Shares to
be issued in connection with all Draw Downs and the shares of Common Stock
issuable pursuant to the exercise of Warrants.
Section 2.3 The Warrants. At each Settlement Date, the Company
shall issue to the Purchaser a warrant (the "Warrant"), to purchase up to 50% of
the number of shares of Common Stock purchased for each Settlement Period (such
percentage, as may be adjusted below, the "Warrant Coverage"), each Warrant
being exercisable for a period of three (3) years commencing on date of issuance
of such Warrant. Each Warrant shall be exercisable at the exercise price of 115%
of the price per Share paid by the Purchaser during such Settlement Period. The
Warrant Coverage shall be adjusted as follows:
(1) If the Threshold Price is equal to or less than $1.00, the Warrant Coverage
shall be 50%;
(2) If the Threshold Price exceeds $1.00, up to and including $2.00, the
Warrant Coverage shall be 40%; and
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3) If the Threshold Price exceeds $2.00, the Warrant Coverage shall be 30%.
No Warrant shall be exercisable if the shares of Common Stock issuable
upon any exercise of such Warrant, when aggregated with all other shares of
Common Stock then owned by the Purchaser, would result in the Purchaser owning
more than 9.99% of all of such Common Stock as would be outstanding on such date
of exercise, as determined in accordance with Section 16 of the Exchange Act and
the regulations promulgated thereunder.
Section 2.4 Closing. In consideration of and in express
reliance upon the representations, warranties, covenants, terms and conditions
of this Agreement, the Company agrees to issue and sell to the Purchaser and the
Purchaser agrees to purchase from the Company, that number of the Shares to be
issued in connection with each Draw Down. The closing of the execution and
delivery of this Agreement (the "Closing") shall take place at the offices of
Parker Chapin LLP, The Chrysler Building, 405 Lexington Avenue, New York, NY
10174 at 5:00 p.m. Eastern Time on (i) October 27, 2000, or (ii) such other time
and place or on such date as the Purchaser and the Company may agree upon (the
"Closing Date"). Each party shall deliver all documents, instruments and
writings required to be delivered by such party pursuant to this Agreement at or
prior to the Closing.
ARTICLE III
Representations and Warranties
Section 3.1 Representations and Warranties of the Company. The Company
hereby makes the following representations and warranties to the Purchaser:
(a) Organization, Good Standing and Power. The Company is a corporation
duly incorporated, validly existing and in good standing under the laws of
Delaware and has the requisite corporate power to own, lease and operate its
properties and assets and to conduct its business as it is now being conducted.
As of the date hereof, the Company does not have any subsidiaries (as defined in
Section 3.1(g)) except as set forth in the Company's most recent Form 10-SKB,
including the accompanying financial statements (the "Form 10-KSB"), or in the
Company's most recent Form 10-QSB (the "Form 10-QSB"), or on Schedule 3.1(g)
attached hereto. The Company and each such subsidiary is duly qualified to do
business as a foreign corporation and is in good standing in every jurisdiction
in which the nature of the business conducted or property owned by it makes such
qualification necessary except for any jurisdiction in which the failure to be
so qualified will not have a Material Adverse Effect.
(b) Authorization; Enforcement. The Company has the requisite corporate
power and authority to enter into and perform this Agreement and to issue and
sell the Shares in accordance with the terms hereof. The execution, delivery and
performance of this Agreement by the Company and the consummation by it of the
transactions contemplated hereby have been duly and validly authorized by all
necessary corporate action, and, except as contemplated by Section 3.1(e). This
Agreement has been duly executed and delivered by the Company. This Agreement
constitutes, or when executed and delivered shall constitute, a valid and
binding obligation of the Company enforceable against the Company in accordance
with its terms, except as such enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium, liquidation,
conservatorship, receivership or similar laws relating to, or affecting
generally the enforcement of creditor's rights and remedies or by other
equitable principles of general application.
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(c) Capitalization. The authorized capital stock of the Company and the
shares thereof issued and outstanding as of October 6, 2000 are set forth on
Schedule 3.1(c) attached hereto. All of the outstanding shares of the Company's
Common Stock have been duly and validly authorized, and are fully paid and
non-assessable. Except as set forth in this Agreement or on Schedule 3.1(c)
attached hereto, as of October 6, 2000, no shares of Common Stock are entitled
to preemptive rights or registration rights and there are no outstanding
options, warrants, scrip, rights to subscribe to, call or commitments of any
character whatsoever relating to, or securities or rights convertible into, any
shares of capital stock of the Company. Furthermore, except as set forth on
Schedule 3.1(c) attached hereto and except as set forth in this Agreement, as of
the date hereof, there are no contracts, commitments, understandings, or
arrangements by which the Company is or may become bound to issue additional
shares of the capital stock of the Company or options, securities or rights
convertible into shares of capital stock of the Company. Except as set forth on
Schedule 3.1(c) attached hereto and except for customary transfer restrictions
contained in agreements entered into by the Company in order to sell restricted
securities, as of the date hereof, the Company is not a party to any agreement
granting registration rights to any person with respect to any of its equity or
debt securities. The Company is not a party to, and it has no knowledge of, any
agreement restricting the voting or transfer of any shares of the capital stock
of the Company. The offer and sale of all capital stock, convertible securities,
rights, warrants, or options of the Company issued prior to the Closing complied
with all applicable federal and state securities laws, and no stockholder has a
right of rescission or damages with respect thereto which would have a Material
Adverse Effect. The Company has furnished or made available to the Purchaser
true and correct copies of the Company's Certificate of Incorporation as in
effect on the date hereof (the "Certificate"), and the Company's Bylaws as in
effect on the date hereof (the "Bylaws").
(d) Issuance of Shares. The sale and issuance of the Shares in accordance
with the terms and on the basis of the representations and warranties set forth
in this Agreement will be exempt from the registration requirements of the
Securities Act. The Shares have been duly authorized by all necessary corporate
action and, when paid for or issued in accordance with the terms hereof, the
Shares shall be validly issued and outstanding, fully paid and non-assessable,
and the Purchaser shall be entitled to all rights accorded to a holder of Common
Stock.
(e) No Conflicts. The execution, delivery and performance of this Agreement
by the Company and the consummation by the Company of the transactions
contemplated therein do not (i) violate any provision of the Company's
Certificate or Bylaws, (ii) conflict with, or constitute a default (or an event
which with notice or lapse of time or both would become a default) under, or
give to others any rights of termination, amendment, acceleration or
cancellation of, any material agreement, mortgage, deed of trust, indenture,
note, bond, license, lease agreement, instrument or obligation to which the
Company is a party, (iii) create or impose a lien, charge or encumbrance on any
property of the Company under any agreement or any commitment to which the
Company is a party or by which the Company is bound or
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by which any of its respective properties or assets are bound, or (iv) result in
a violation of any federal, state, local or foreign statute, rule, regulation,
order, judgment or decree (including federal and state securities laws and
regulations) applicable to the Company or any of its subsidiaries or by which
any property or asset of the Company or any of its subsidiaries are bound or
affected, except, in all cases, for such conflicts, defaults, terminations,
amendments, acceleration, cancellations and violations as would not,
individually or in the aggregate, have a Material Adverse Effect. The Company is
not required under federal, state or local law, rule or regulation to obtain any
consent, authorization or order of, or make any filing or registration with, any
court or governmental agency in order for it to execute, deliver or perform any
of its obligations under this Agreement, or issue and sell the Shares in
accordance with the terms hereof (other than any filings which may be required
to be made by the Company with the Commission, or Nasdaq subsequent to the
Closing, and, any registration statement which may be filed pursuant hereto);
provided that, for purpose of the representation made in this sentence, the
Company is assuming and relying upon the accuracy of the relevant
representations and agreements of the Purchaser herein.
(f) Commission Documents, Financial Statements. The Company has timely
filed all reports, schedules, forms, statements and other documents required to
be filed by it with the Securities and Exchange Commission (the "Commission")
pursuant to the reporting requirements of the Exchange Act, including material
filed pursuant to Section 13(a) or 15(d) of the Exchange Act (all of the
foregoing including filings incorporated by reference therein being referred to
herein as the "Commission Documents"). The Company has delivered or made
available to the Purchaser true and complete copies of the Commission Documents
filed with the Commission since September 15, 2000 and prior to the Closing
Date. The Company has not provided to the Purchaser any information which,
according to applicable law, rule or regulation, should have been disclosed
publicly by the Company but which has not been so disclosed, other than with
respect to the transactions contemplated by this Agreement. The Form 10-KSB for
the year ended December 31, 1999 complied in all material respects with the
requirements of the Exchange Act and the rules and regulations of the Commission
promulgated thereunder and other federal, state and local laws, rules and
regulations applicable to such document, and, as of its date, such Form 10-KSB
did not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading. The financial statements of the Company included in the
Commission Documents complied as to form in all material respects with
applicable accounting requirements and the published rules and regulations of
the Commission or other applicable rules and regulations with respect thereto.
Such financial statements have been prepared in accordance with generally
accepted accounting principles ("GAAP") applied on a consistent basis during the
periods involved (except (i) as may be otherwise indicated in such financial
statements or the notes thereto or (ii) in the case of unaudited interim
statements, to the extent they may not include footnotes or may be condensed or
summary statements), and fairly present in all material respects the financial
position of the Company and its subsidiaries as of the dates thereof and the
results of operations and cash flows for the periods then ended (subject, in the
case of unaudited statements, to normal year-end audit adjustments).
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(g) Subsidiaries. The Commission Documents or Schedule 3.1(g) attached
hereto set forth each subsidiary of the Company as of the date hereof, showing
the jurisdiction of its incorporation or organization and showing the percentage
of each person's ownership of the outstanding stock or other interests of such
subsidiary. For the purposes of this Agreement, "subsidiary" shall mean any
corporation or other entity of which at least a majority of the securities or
other ownership interest having ordinary voting power (absolutely or
contingently) for the election of directors or other persons performing similar
functions are at the time owned directly or indirectly by the Company and/or any
of its other subsidiaries. Except as set forth in the Commission Documents or
the Commission Filings, none of such subsidiaries is a "significant subsidiary"
as defined in Regulation S-X.
(h) No Material Adverse Change. Since June 30, 2000, the Company has not
experienced or suffered any Material Adverse Effect, except continued losses
from operations.
(i) No Undisclosed Liabilities. Neither the Company nor any of its
subsidiaries has any liabilities, obligations, claims or losses (whether
liquidated or unliquidated, secured or unsecured, absolute, accrued, contingent
or otherwise) that would be required to be disclosed on a balance sheet of the
Company or any subsidiary (including the notes thereto) in conformity with GAAP
and are not disclosed in the Commission Documents or Commission Filings, other
than those incurred in the ordinary course of the Company's or its subsidiaries'
respective businesses since June 30, 2000 and which, individually or in the
aggregate, do not or would not have a Material Adverse Effect.
(j) No Undisclosed Events or Circumstances. No event or circumstance has
occurred or exists with respect to the Company or its subsidiaries or their
respective businesses, properties, prospects, operations or financial condition,
which, under applicable law, rule or regulation, requires public disclosure or
announcement by the Company but which has not been so publicly announced or
disclosed and which, individually or in the aggregate, do not or would not have
a Material Adverse Effect.
(k) Indebtedness. Except as set forth on Schedule 3.1(k), the Commission
Documents or the Commission Filings set forth as of June 30, 2000 all
outstanding secured and unsecured Indebtedness of the Company or any subsidiary,
or for which the Company or any subsidiary has commitments. For the purposes of
this Agreement, "Indebtedness" shall mean (a) any liabilities for borrowed money
or amounts owed in excess of $100,000 (other than trade accounts payable
incurred in the ordinary course of business), (b) all guaranties, endorsements
and other contingent obligations in respect of Indebtedness of others, whether
or not the same are or should be reflected in the Company's balance sheet (or
the notes thereto), except guaranties by endorsement of negotiable instruments
for deposit or collection or similar transactions in the ordinary course of
business; and (c) the present value of any lease payments in excess of $100,000
due under leases required to be capitalized in accordance with GAAP. Neither the
Company nor any subsidiary is in default with respect to any Indebtedness.
(l) Title to Assets. Each of the Company and the subsidiaries has good and
marketable title to all of its real and personal property reflected in the
Commission Documents, free of any mortgages, pledges, charges, liens, security
interests or other encumbrances. All leases of the Company and each of its
subsidiaries are valid and subsisting and in full force and effect in all
material respects.
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(m) Actions Pending. There is no action, suit, claim, investigation or
proceeding pending or, to the knowledge of the Company, threatened against the
Company or any subsidiary which questions the validity of this Agreement or the
transactions contemplated hereby or any action taken or to be taken pursuant
hereto or thereto. Except as set forth in the Commission Documents or the
Commission Filings, there is no action, suit, claim, investigation or proceeding
pending or, to the knowledge of the Company, threatened, against or involving
the Company, any subsidiary or any of their respective properties or assets and
which, if adversely determined, is reasonably likely to result in a Material
Adverse Effect.
(n) Compliance with Law. The business of the Company and the subsidiaries
has been and is presently being conducted in accordance with all applicable
federal, state and local governmental laws, rules, regulations and ordinances,
except as set forth in the Commission Documents or the Commission Filings or
such that do not cause a Material Adverse Effect. The Company and each of its
subsidiaries have all franchises, permits, licenses, consents and other
governmental or regulatory authorizations and approvals necessary for the
conduct of its business as now being conducted by it, except for such
franchises, permits, licenses, consents and other governmental or regulatory
authorizations and approvals, the failure to possess which, individually or in
the aggregate, could not reasonably be expected to have a Material Adverse
Effect.
(o) Certain Fees. No brokers, finders or financial advisory fees or
commissions will be payable by the Company or any subsidiary with respect to the
transactions contemplated by this Agreement.
(p) Disclosure. Neither this Agreement or the Schedules hereto nor any
other documents, certificates or instruments furnished to the Purchaser by or on
behalf of the Company or any subsidiary in connection with the transactions
contemplated by this Agreement contain any untrue statement of a material fact
or omit to state a material fact necessary in order to make the statements made
herein or therein, in the light of the circumstances under which they were made
herein or therein, not misleading.
(q) Operation of Business. The Company or one of the subsidiaries owns or
possesses all patents, trademarks, domain names (whether or not registered) and
any patentable improvements or copyrightable derivative works thereof, websites
and intellectual property rights relating thereto, service marks, trade names,
copyrights, licenses and authorizations as set forth in the Commission Documents
or the Commission Filings and all rights with respect to the foregoing, which
are necessary for the conduct of its business as now conducted without any
conflict with the rights of others, except to the extent set forth in the
Commission Documents or that a Material Adverse Effect could not reasonably be
expected to result from such conflict.
(r) Environmental Compliance. The Company and each of its subsidiaries have
obtained all material approvals, authorization, certificates, consents,
licenses, orders and permits or other similar authorizations of all governmental
authorities, or from any other person, that are required under any Environmental
Laws. "Environmental Laws" shall mean all applicable laws relating to the
protection of the environment including, without limitation, all requirements
pertaining to reporting, licensing, permitting, controlling, investigating or
remediating emissions, discharges, releases or threatened releases of hazardous
substances, chemical substances, pollutants, contaminants or toxic substances,
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materials or wastes, whether solid, liquid or gaseous in nature, into the air,
surface water, groundwater or land, or relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling of
hazardous substances, chemical substances, pollutants, contaminants or toxic
substances, material or wastes, whether solid, liquid or gaseous in nature.
Except for such instances as would not individually or in the aggregate have a
Material Adverse Effect, there are no past or present events, conditions,
circumstances, incidents, actions or omissions relating to or in any way
affecting the Company or its subsidiaries that violate or could violate any
Environmental Law after the Closing or that could give rise to any environmental
liability, or otherwise form the basis of any claim, action, demand, suit,
proceeding, hearing, study or investigation (i) under any Environmental Law, or
(ii) based on or related to the manufacture, processing, distribution, use,
treatment, storage (including without limitation underground storage tanks),
disposal, transport or handling, or the emission, discharge, release or
threatened release of any hazardous substance.
(s) Material Agreements. Neither the Company nor any subsidiary is a party
to any written or oral contract, instrument, agreement, commitment, obligation,
plan or arrangement, a copy of which would be required to be filed with the
Commission as an exhibit to a Commission Filing (collectively, "Material
Agreements") if the Company or any subsidiary were registering securities under
the Securities Act immediately prior to the effectiveness of this Agreement. The
Company and each of its subsidiaries has in all material respects performed all
the obligations required to be performed by them to date under the foregoing
agreements, have received no notice of default and, are not in default under any
Material Agreement now in effect.
(t) Transactions with Affiliates. Except as set forth in the Commission
Documents or the Commission Filings, there are no loans, leases, agreements,
contracts, royalty agreements, management contracts or arrangements or other
continuing transactions exceeding $100,000 between (a) the Company, any
subsidiary or any of their respective customers (excluding agreements related to
the purchase or lease of the Company's products) or suppliers on the one hand,
and (b) on the other hand, any officer, employee, consultant or director of the
Company, or any of its subsidiaries, or any person who would be covered by Item
404(a) of Regulation S-K or any corporation or other entity controlled by such
officer, employee, consultant, director or person.
(u) Securities Act of 1933. The Company has complied in all material
respects with all applicable federal and state securities laws in connection
with the offer, issuance and sale of the Shares hereunder. The Company has not
distributed and, prior to the completion of the sale of the Shares to the
Purchaser, will not distribute any offering material in connection with the
offer and sale of the Shares other than the Registration Statement, the
Prospectus or other materials, if any, permitted by the Securities Act.
(v) No Integrated Offering. Neither the Company, nor any of its affiliates,
nor any person acting on its or their behalf has, directly or indirectly, made
any offers or sales of any security or solicited any offers or sales of any
security or solicited any offers to buy any security, other than pursuant to
this Agreement, under circumstances that would require registration of the
Common Stock under the Securities Act. Neither the Company nor any of its
affiliates nor any person acting on its behalf has conducted or will conduct any
general solicitation (as that term is defined in Rule 502(c) of Regulation D) or
general advertising with respect to any of the Shares, the Warrants or any of
the shares of Common Stock issuable pursuant to exercise of the Warrants.
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(w) Employees. As of the date hereof, neither the Company nor any
subsidiary has any collective bargaining arrangements or agreements covering any
of its employees, except as set forth in the Commission Documents or the
Commission Filings. Each of the Company and its subsidiaries requires its
officers, employees and certain consultants to enter into agreements regarding
proprietary information, noncompetition, nonsolicitation, confidentiality, or
other similar agreements containing restrictive covenants. As of the date
hereof, no officer, consultant or key employee of the Company or any subsidiary
whose termination, either individually or in the aggregate, could reasonably be
expected to have a Material Adverse Effect, has terminated or, to the knowledge
of the Company, has any present intention of terminating his or her employment
or engagement with the Company or any subsidiary.
(x) Use of Proceeds. The proceeds from the sale of the Shares will be used
by the Company and its subsidiaries for the purposes set forth in the Prospectus
under "Use of Proceeds." (y) Public Utility Holding Company Act and Investment
Company Act Status. The Company is not a "holding company" or a "public utility
company" as such terms are defined in the Public Utility Holding Company Act of
1935, as amended. The Company is not, and as a result of and immediately upon
Closing will not be, an "investment company" or a company "controlled" by an
"investment company," within the meaning of the Investment Company Act of 1940,
as amended.
(z) ERISA. No liability to the Pension Benefit Guaranty Corporation has
been incurred with respect to any Plan by the Company or any of its subsidiaries
which is or would have a Material Adverse Effect. The execution and delivery of
this Agreement and the issue and sale of the Shares will not involve any
transaction which is subject to the prohibitions of Section 406 of ERISA or in
connection with which a tax could be imposed pursuant to Section 4975 of the
Internal Revenue Code of 1986, as amended, provided that, if any of the
Purchaser, or any person or entity that owns a beneficial interest in any of the
Purchaser, is an "employee pension benefit plan" (within the meaning of Section
3(2) of ERISA) with respect to which the Company is a "party in interest"
(within the meaning of Section 3(14) of ERISA), the requirements of Sections
407(d)(5) and 408(e) of ERISA, if applicable, are met. As used in this Section
3.1(y), the term "Plan" shall mean an "employee pension benefit plan" (as
defined in Section 3 of ERISA) which is or has been established or maintained,
or to which contributions are or have been made, by the Company or any
subsidiary or by any trade or business, whether or not incorporated, which,
together with the Company or any subsidiary, is under common control, as
described in Section 414(b) or (c) of the Code.
(aa) Acknowledgment Regarding Purchaser's Purchase of Shares. The Company
acknowledges and agrees that the Purchaser is acting solely in the capacity of
arm's length purchaser with respect to this Agreement and the transactions
contemplated hereunder. The Company further acknowledges that the Purchaser is
not acting as a financial advisor or fiduciary of the Company (or in any similar
capacity) with respect to this Agreement and the transactions contemplated
hereunder and any advice given by the Purchaser or any of its representatives or
agents in connection with this Agreement and the transactions contemplated
hereunder is merely incidental to the Purchaser's purchase of the Shares.
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Section 3.2 Representations, Warranties and Covenants of the
Purchaser. The Purchaser hereby makes the following representations,
warranties and covenants to the Company:
(a) Organization and Standing of the Purchaser. The Purchaser is a limited
liability company duly organized, validly existing and in good standing under
the laws of the Commonwealth of The Bahamas.
(b) Authorization and Power. The Purchaser has the requisite corporate
power and authority to enter into and perform this Agreement and to purchase the
Shares in accordance with the terms hereof. The execution, delivery and
performance of this Agreement by Purchaser and the consummation by it of the
transactions contemplated hereby have been duly authorized by all necessary
corporate action, and no further consent or authorization of the Purchaser, its
Board of Directors or stockholders is required. This Agreement has been duly
executed and delivered by the Purchaser. This Agreement constitutes a valid and
binding obligation of the Purchaser enforceable against the Purchaser in
accordance with its terms, except as such enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium, liquidation,
conservatorship, receivership, or similar laws relating to, or affecting
generally the enforcement of creditor's rights and remedies or by other
equitable principles of general application.
(c) No Conflicts. The execution, delivery and performance of this Agreement
and the consummation by the Purchaser of the transactions contemplated hereby
and thereby or relating hereto do not and will not (i) result in a violation of
such Purchaser's charter documents or bylaws or (ii) conflict with, or
constitute a default (or an event which with notice or lapse of time or both
would become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation of any material agreement, mortgage,
deed of trust, indenture, note, bond, license, lease agreement, instrument or
obligation to which the Purchaser is a party, (iii) create or impose any lien,
charge or encumbrance on any property of the Purchaser under any agreement or
any commitment to which the Purchaser is party or by which the Purchaser is on
or by which any of its respective properties or assets are bound or (iv) result
in a violation of any law, rule or regulation, or any order, judgment or decree
of any court or governmental agency applicable to the Purchaser or its
properties, except for such conflicts, defaults and violations as would not,
individually or in the aggregate, prohibit or otherwise interfere with the
ability of the Purchaser to enter into and perform its obligations under this
Agreement in any material respect. The Purchaser is not required to obtain any
consent, authorization or order of, or make any filing or registration with, any
court or governmental agency in order for it to execute, deliver or perform any
of its obligations under this Agreement or to purchase the Shares in accordance
with the terms hereof, provided that for purposes of the representation made in
this sentence, the Purchaser is assuming and relying upon the accuracy of the
relevant representations and agreements of the Company herein.
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(d) Information. The Purchaser and its advisors, if any, have been
furnished with all materials relating to the business, finances and operations
of the Company and materials relating to the offer and sale of the Shares which
have been requested by the Purchaser. The Purchaser and its advisors, if any,
have been afforded the opportunity to ask questions of the Company. The
Purchaser has sought such accounting, legal and tax advice as it has considered
necessary to make an informed investment decision with respect to its
acquisition of the Shares. Purchaser understands that it (and not the Company)
shall be responsible for its own tax liabilities that may arise as a result of
this investment or the transactions contemplated by this Agreement.
(e) Acquisition for Investment. The Purchaser is purchasing the Shares
solely for its own account for the purpose of investment and not with a view to
or for sale in connection with a distribution. The Purchaser has no present
intention to sell the Shares, nor a present arrangement (whether or not legally
binding) to effect any distribution of the Shares to or through any person or
entity; provided, however, that by making the representations herein, the
Purchaser does not agree to hold the Common Stock for any minimum or other
specific term and reserves the right to dispose of the Common Stock at any time
in accordance with federal and state securities laws applicable to such
disposition.
(f) Sophisticated Investor. The Purchaser is a sophisticated investor (as
described in Rule 506(b) (2) (ii) of Regulation D) and an accredited investor
(as defined in Rule 501 of Regulation D), and the Purchaser has such experience
in business and financial matters that it is capable of evaluating the merits
and risks of an investment in Common Stock. The Purchaser acknowledges that an
investment in the Common Stock is speculative and involves a high degree of
risk.
(g) Ten Percent Limitation. On each Settlement Date, the number of Shares
then to be purchased by the Purchaser shall not exceed the number of such shares
that, when aggregated with all other shares of Common Stock then owned by the
Purchaser beneficially or deemed beneficially owned by the Purchaser, would
result in the Purchaser owning more than 9.9% of all of such Common Stock as
would be outstanding on such Settlement Date, as determined in accordance with
Section 16 of the Exchange Act and the regulations promulgated thereunder. For
purposes of this Section 3.2(g), in the event that the amount of Common Stock
outstanding as determined in accordance with Section 16 of the Exchange Act and
the regulations promulgated thereunder is greater on a Settlement Date than on
the date upon which the Draw Down Notice associated with such Settlement Date is
given, the amount of Common Stock outstanding on such Settlement Date shall
govern for purposes of determining whether the Purchaser, when aggregating all
purchases of Common Stock made pursuant to this Agreement would own more than
9.9% of the Common Stock following such Settlement Date.
(h) General. The Purchaser understands that the Shares are being offered
and sold in reliance on a transactional exemption from the registration
requirement of federal and state securities laws and the Company is relying upon
the truth and accuracy of the representations, warranties, agreements,
acknowledgments and understandings of the Purchaser set forth herein in order to
determine the applicability of such exemptions and the suitability of the
Purchaser to acquire the Shares.
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ARTICLE IV
Covenants
The Company covenants with the Purchaser as follows, which covenants
are for the benefit of the Purchaser and its permitted assignees (as defined
herein).
Section 4.1 Securities. The Company shall notify the Commission and the
OTC Bulletin Board or an Alternate Market, if applicable, in accordance with
their rules and regulations, of the transactions contemplated by this Agreement,
and shall take all other necessary actions and proceedings as may be required
and permitted by applicable law, rule and regulation, for the legal and valid
issuance of the Shares to the Purchaser and the resale of the Shares by the
Purchaser.
Section 4.2 Registration and Listing. The Company will take all
action necessary to cause its Common Stock to be registered under Sections 12(b)
or 12(g) of the Exchange Act, will comply in all respects with its reporting and
filing obligations under the Exchange Act, and will not take any action or file
any document (whether or not permitted by the Securities Act or the rules
promulgated thereunder) to terminate or suspend such registration or to
terminate or suspend its reporting and filing obligations under the Exchange Act
or Securities Act, except as permitted herein. The Company will take all action
necessary to continue the listing or trading of its Common Stock and the listing
of the Shares purchased by Purchaser hereunder on the OTC BB or an Alternate
Market, if applicable, and will comply in all respects with the Company's
reporting, filing and other obligations under the bylaws or rules of the OTC BB
or an Alternate Market.
Section 4.3 Registration Statement.
(a) On or before October 31, 2000 (the "Filing Date"), the Company shall
cause to be filed with the Commission a Registration Statement on Form SB-2 (or
any other comparable form) to register for resale the Shares (pursuant to a Draw
Down or the exercise of any Warrant) to be purchased by the Purchaser pursuant
to this Agreement. The Company shall use its reasonable best efforts to take all
steps necessary to cause the Registration Statement to be declared effective by
February 28, 2000, but in no event later than 120 days after the Filing Date.
(b) Before the Purchaser shall be obligated to accept any Draw Down request
from the Company, the Company shall have caused a sufficient number of shares of
Common Stock to be registered to cover the Shares to be issued in connection
with such Draw Down request (including any Warrants to be exercised in
connection therewith).
(c) The Company shall file a prospectus supplement to its then current
Registration Statement on the first business day immediately following the end
of each Settlement Period, and will deliver a prospectus and a prospectus
supplement to the Purchaser on the corresponding Settlement Date.
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Section 4.4 Compliance with Laws. The Company shall comply, and cause each
subsidiary to comply, with all applicable laws, rules, regulations and orders,
noncompliance with which could reasonably be expected to have a Material Adverse
Effect.
Section 4.5 Keeping of Records and Books of Account. The Company shall keep
and cause each subsidiary to keep adequate records and books of account, in
which complete entries will be made in accordance with GAAP consistently
applied, reflecting all financial transactions of the Company and its
subsidiaries, and in which, for each fiscal year, all proper reserves for
depreciation, depletion, obsolescence, amortization, taxes, bad debts and other
purposes in connection with its business shall be made.
Section 4.6 Reporting Requirements. Upon written request, the Company shall
furnish the following to the Purchaser so long as such Purchaser shall be
obligated hereunder to purchase Shares:
(a) Quarterly Reports filed with the Commission on Form 10-QSB as soon as
available, and in any event within 45 days after the end of each of the first
three fiscal quarters of the Company; and
(b) Annual Reports filed with the Commission on Form 10-KSB as soon as
available, and in any event within 90 days after the end of each fiscal year of
the Company.
Section 4.7 Other Agreements.
(a) An Other Financing. The Company may enter into any other financing
agreement, the primary purpose of which would be to obtain equity financing for
the Company, during the Investment Period (an "Other Financing"), including a
financing involving (i) the issuance of Common Stock or securities convertible,
exercisable or exchangeable into Common Stock at a fixed or variable future
market price or at a fixed or variable price determined at a discount to the
current market price or the then current market price of the Common Stock, (ii)
a mechanism for the repricing or reset of the purchase price of the Common Stock
to below the then current market price, or (iii) the issuance of Common Stock
with warrants which have an exercise price such that together with the price of
the Common Stock would result in the issuance of shares of Common Stock at a
discount to the then current market price of the Common Stock (each of clauses
(i), (ii) and (iii) shall constitute a "Discounted Financing"); provided,
however, that notice of any such transaction is provided to the Purchaser in
accordance with the provisions of this Agreement and the Warrant.
(b) An Other Financing During a Draw Down Pricing Period. If the Company
enters into an Other Financing during a Draw Down Pricing Period, the Purchaser
shall have the option (the "Draw Down Pricing Period Purchase Option"), which
option shall be exercised within five (5) calendar days of the date the
Purchaser has received notice of such Other Financing, to (i) purchase the Draw
Down Amount of shares of Common Stock on the terms at which the Company issued
shares of Common Stock in the Other Financing during such Draw Down Pricing
Period, (ii) purchase the Draw Down Amount of shares of Common Stock at the
applicable Draw Down Discount Percentage times the VWAP for such Draw Down
Pricing Period, or (iii) elect not to purchase any Shares during such Draw Down
Pricing Period. The Purchaser shall notify the Company of its election on the
business day preceding the Settlement Date.
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(c) An Other Financing Not During A Draw Down Pricing Period. If the
Company enters into an Other Financing during the Investment Period but not
during a Draw Down Pricing Period, the Purchaser shall have the option (the
Non-Draw Down Pricing Period Purchase Option"), which option shall be exercised
within five (5) calendar days of the date the Purchaser has received notice of
such Other Financing, to (i) purchase up to the same number of shares of Common
Stock issued or to be issued in the Other Financing at the price and on such
terms of the Other Financing, or (ii) elect not to purchase any shares of Common
Stock to be issued in the Other Financing.
(d) Exercise of the Purchase Option. Regardless of whether an Other
Financing occurs during a Draw Down Pricing Period, if the Purchaser does not
exercise its Draw Down Pricing Period Purchase Option or Non-Draw Down Pricing
Period Purchase Option, as the case may be, in writing before 5 p.m., Eastern
Time, on such fifth (5th) calendar day following the Purchaser's receipt of
notice of the applicable Other Financing, the Company shall have the right to
close such Other Financing on the scheduled closing date with a third party;
provided that all of the financial terms and conditions of such closing are the
same as those provided to the Purchaser.
Section 4.8 Non-Public Information. Neither the Company nor any of its
directors, officers or agents shall disclose any material non-public information
about the Company to the Purchaser.
Section 4.9 No Stop Orders. The Company will advise the Purchaser promptly
and, if requested by the Purchaser, will confirm such advice in writing: (i) of
its receipt of notice of any request by the Commission for amendment of or a
supplement to the Registration Statement, any Prospectus or for additional
information; (ii) of its receipt of notice of the issuance by the Commission of
any stop order suspending the effectiveness of the Registration Statement or of
the suspension of qualification of the Shares for offering or sale in any
jurisdiction or the initiation of any proceeding for such purpose; and (iii) of
its becoming aware of the happening of any event, which makes any statement of a
material fact made in the Registration Statement or the Prospectus (as then
amended or supplemented) untrue or which requires the making of any additions to
or changes in the Registration Statement or the Prospectus (as then amended or
supplemented) in order to state a material fact required by the Securities Act
or the regulations thereunder to be stated therein or necessary in order to make
the statements therein not misleading, or of the necessity to amend or
supplement the Prospectus (as then amended or supplemented) to comply with the
Securities Act or any other law. If at any time the Commission shall issue any
stop order suspending the effectiveness of the Registration Statement, the
Company will make commercially reasonable efforts to obtain the withdrawal of
such order at the earliest possible time.
Section 4.10 Amendments to the Registration Statement. The Company will not
(i) file any amendment to the Registration Statement or make any amendment or
supplement to the Prospectus of which the Purchaser shall not previously have
been advised or to which the Purchaser shall reasonably object after being so
advised or (ii) so long as, in the reasonable opinion of counsel for the
Purchaser, a Prospectus is required to be delivered in connection with sales by
any Purchaser or dealer, file any information, documents or reports pursuant to
the Exchange Act without delivering a copy of such information, documents or
reports to the Purchaser promptly following such filing.
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Section 4.11 Prospectus Delivery. Prior to any Settlement Date, the Company
will deliver to the Purchaser, without charge, in such quantities as reasonably
requested by the Purchaser, copies of each form of Prospectus. As soon after the
Registration Statement has been declared effective by the Commission and
thereafter from time to time for such period as in the opinion of counsel for
the Purchaser a prospectus is required by the Securities Act to be delivered in
connection with sales by the Purchaser, the Company will expeditiously deliver
to the Purchaser, without charge, as many copies of the Prospectus (and of any
amendment or supplement thereto) as the Purchaser may reasonably request. The
Company consents to the use of the Prospectus (and of any amendment or
supplement thereto) in accordance with the provisions of the Securities Act and
with the securities or Blue Sky laws of the jurisdictions in which the Shares
may be sold by the Purchaser, in connection with the offering and sale of the
Shares and for such period of time thereafter as the Prospectus is required by
the Securities Act to be delivered in connection with sales of the Shares. If
during such period of time any event shall occur that in the judgment of the
Company or in the opinion of counsel for the Purchaser is required to be set
forth in the Prospectus (as then amended or supplemented) or should be set forth
therein in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading, or if it is necessary
to supplement or amend the Prospectus to comply with the Securities Act or any
other law, the Company will forthwith prepare and, subject to the provisions of
Section 4.10 above, file with the Commission an appropriate supplement or
amendment thereto, and will expeditiously furnish to the Purchaser a reasonable
number of copies thereof. The Company shall file a prospectus supplement to its
current Registration Statement on the first business day immediately following
the end of each Settlement Period, and the Company shall deliver to the
Purchaser an appropriate Prospectus and prospectus supplement on each Settlement
Date.
Section 4.12 Legends. The certificates evidencing the Shares and the shares
of Common Stock issuable upon exercise of the Warrants shall be free of legends,
except as provided for in Article VII.
ARTICLE V
Conditions to Closing and Draw Downs
Section 5.1 Conditions Precedent to the Obligation of the Company to Close
this Agreement. The obligation hereunder of the Company to enter into this
Agreement is subject to the satisfaction or waiver, at or before the Closing, of
each of the conditions set forth below. These conditions are for the Company's
sole benefit and may be waived by the Company at any time in its sole
discretion.
(a) No Injunction. No statute, regulation, executive order, decree, ruling
or injunction shall have been enacted, entered, promulgated or endorsed by any
court or governmental authority of competent jurisdiction which prohibits the
consummation of any of the transactions contemplated by this Agreement.
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(d) No Proceedings or Litigation. No action, suit or proceeding before any
arbitrator or any governmental authority shall have been commenced, and no
investigation by any governmental authority shall have been threatened, against
the Company or any subsidiary, or any of the officers, directors or affiliates
of the Company or any subsidiary seeking to restrain, prevent or change the
transactions contemplated by this Agreement, or seeking damages in connection
with such transactions.
Section 5.2 Conditions Precedent to the Obligation of the Purchaser to
Close this Agreement. The obligation hereunder of the Purchaser to enter this
Agreement is subject to the satisfaction or waiver, at or before the Closing, of
each of the conditions set forth below. These conditions are for the Purchaser's
sole benefit and may be waived by the Purchaser at any time in its sole
discretion.
(a) No Injunction. No statute, rule, regulation, executive order, decree,
ruling or injunction shall have been enacted, entered, promulgated or endorsed
by any court or governmental authority of competent jurisdiction which prohibits
the consummation of any of the transactions contemplated by this Agreement.
(b) No Proceedings or Litigation. No action, suit or proceeding before any
arbitrator or any governmental authority shall have been commenced, and no
investigation by any governmental authority shall have been threatened, against
the Company or any subsidiary, or any of the officers, directors or affiliates
of the Company or any subsidiary seeking to restrain, prevent or change the
transactions contemplated by this Agreement, or seeking damages in connection
with such transactions.
(c) Opinion of Counsel, etc. At the Closing, the Purchaser shall have
received an opinion of counsel to the Company, dated the date of Closing, in the
form of Exhibit A hereto, and such other certificates and documents as the
Purchaser or its counsel shall reasonably require incident to the Closing.
Section 5.3 Conditions Precedent to the Obligation of the Purchaser to
Accept a Draw Down and Purchase the Shares. The obligation hereunder of the
Purchaser to accept a Draw Down request and to acquire and pay for the Shares is
subject to the satisfaction or waiver, at or before the date of each Draw Down
request (the "Draw Down Exercise Date"), of each of the conditions set forth
below. The conditions are for the Purchaser's sole benefit and may be waived by
the Purchaser at any time in its sole discretion.
(a) Accuracy of the Company's Representations and Warranties. Each of the
representations and warranties of the Company shall be true and correct in all
material respects as of the date when made and as of the Draw Down Exercise Date
as though made at that time except for representations and warranties that speak
as of a particular date.
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(b) Effective Registration Statement. The Registration Statement
registering the Shares shall have been declared effective by the Commission
prior to the initial Draw Down Exercise Date, and such Registration Statement
shall remain effective on each Settlement Date, and shall be amended or
supplemented, as required, to disclose the sale of the Shares at least one (1)
trading day prior to each Settlement Date, and the Company shall have delivered
to the Purchaser an appropriate Prospectus on each Settlement Date.
(c) No Suspension. Trading in the Company's Common Stock shall not have
been suspended by the Commission or the OTC BB or an Alternate Market (except
for any suspension of trading of limited duration agreed to by the Company,
which suspension shall be terminated prior to each Draw Down request), and, at
any time prior to such request, trading in securities generally as reported on
the OTC BB or an Alternate Market shall not have been suspended or limited, or
minimum prices shall not have been established on securities whose trades are
reported by the American Stock Exchange, or on the New York Stock Exchange, nor
shall a banking moratorium have been declared either by the United States or New
York State authorities, nor shall there have occurred any material outbreak or
escalation of hostilities or other national or international calamity or crisis
of such magnitude in its effect on, or any material adverse change in any
financial market which, in each case, in the judgment of the Purchaser, makes it
impracticable or inadvisable to purchase the Shares. The Common Stock shall not
have been delisted from the OTC Bulletin Board or an Alternate Market.
(d) Performance by the Company. The Company shall have performed, satisfied
and complied in all material respects with all covenants, agreements and
conditions required by this Agreement to be performed, satisfied or complied
with by the Company at or prior to the Closing. The Company shall have issued
transfer agent instructions to its transfer agent, and an original copy of the
transfer agent instructions shall have been signed by the transfer agent as
acknowledged and agreed.
(e) No Injunction. No statute, rule, regulation, executive order, decree,
ruling or injunction shall have been enacted, entered, promulgated or endorsed
by any court or governmental authority of competent jurisdiction which prohibits
the consummation of any of the transactions contemplated by this Agreement.
(f) No Proceedings or Litigation. No action, suit or proceeding before any
arbitrator or any governmental authority shall have been commenced, and no
investigation by any governmental authority shall have been threatened, against
the Company or any subsidiary, or any of the officers, directors or affiliates
of the Company or any subsidiary seeking to restrain, prevent or change the
transactions contemplated by this Agreement, or seeking damages in connection
with such transactions.
(g) Material Adverse Effect. No Material Adverse Effect shall have
occurred.
(h) No Knowledge. The Company shall have no knowledge of any event more
likely than not to have the effect of causing the Registration Statement to be
suspended or otherwise ineffective (which event is more likely than not to occur
within the 25 trading days following the trading day on which the Draw Down
Notice is deemed delivered.)
(i) Other. On each Settlement Date, the Purchaser shall have received a
certificate in substantially the form and substance of Exhibit B hereto,
executed by an executive officer of the Company to the effect that all the
conditions to such Settlement Date shall have been satisfied as at the date of
each such certificate.
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ARTICLE VI
Draw Down Terms
Section 6.1 Draw Down Terms. Subject to the satisfaction of the conditions
set forth in this Agreement, the parties agree as follows:
(a) The Company, may, in its sole discretion, issue a Draw Down Notice with
respect to a draw down (a "Draw Down") of $100,000 if the Threshold Price is
equal to $1.00, and an additional $50,000 for every $0.50 increase of the
Threshold Price above $1.00 up to $3.50 for a maximum Draw Down Amount of
$350,000, which Draw Down Amount may be increased to a maximum of $612,500 in
accordance with clause (l) of this Section 6.1, and which Draw Down the
Purchaser will be obligated to accept. Prior to issuing any Draw Down Notice,
the Company shall have Shares representing at least the Draw Down Amount
registered under the Registration Statement.
(b) The number of Shares to be issued in connection with each Draw Down
shall be equal to the sum of the quotients (for each trading day of the Draw
Down Pricing Period for which the VWAP equals or exceeds the Threshold Price) of
(x) 1/20th (or such other fraction based upon the agreed upon Draw Down Pricing
Period) of the Draw Down Amount divided by (y) (A) the applicable Draw Down
Discount Percentage multiplied by (B) the VWAP for such day.
(c) Only one Draw Down shall be allowed in each Draw Down Pricing Period.
Each Draw Down Pricing Period shall consist of two (2) periods of ten (10)
consecutive trading days (each, a "Settlement Period").
(d) The number of Shares purchased by the Purchaser with respect to each
Draw Down shall be determined on a daily basis during each Draw Down Pricing
Period and settled on the second business day following the end of each
Settlement Period (the "Settlement Date").
(e) There shall be a minimum of five (5) trading days (or such other number
of trading days mutually agreed upon by the Purchaser and the Company) between
Draw Downs.
(f) There shall be a maximum of twelve (12) Draw Downs during the term of
this Agreement.
(g) Each Draw Down will expire on the last trading day of each Draw Down
Pricing Period.
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(h) For each trading day during the Draw Down Pricing Period that the VWAP
is at or above the Threshold Price, 1/20th (or such other fraction based upon
the agreed upon Draw Down Pricing Period) of the Draw Down Amount shall be
allocated to purchase Shares at a price equal to the product of (x) the Draw
Down Discount Percentage multiplied by (y) the VWAP for such day. If the VWAP on
a given trading day is less than the Threshold Price, then the amount of the
Draw Down for the relevant Draw Down Pricing Period shall be reduced by 1/20th
(or such other fraction, based upon the agreed upon Draw Down Pricing Period).
At no time shall the Threshold Price be set below $1.00 unless agreed upon by
both parties. If trading in the Company's Common Stock is suspended for any
reason for more than three (3) hours in any trading day, the price of the Common
Stock shall be deemed to be below the Threshold Price for that trading day and
the Draw Down Amount for the relevant Draw Down Pricing Period will be reduced
by 1/20th.
(i) The Company must inform the Purchaser via facsimile transmission as to
the Draw Down Amount the Company wishes to exercise before commencement of
trading on the first trading day of the Draw Down Pricing Period (the "Draw Down
Notice"), substantially in the form attached hereto as Exhibit C. In addition to
the Draw Down Amount, the Company shall set the Threshold Price and shall
designate the first trading day of the Draw Down Pricing Period with each Draw
Down Notice.
(j) On each Settlement Date, the Company shall deliver the Shares purchased
by the Purchaser during the Settlement Period to the Purchaser or its designees
via the Purchaser's prime broker account through its Deposit Withdrawal Agent
Commission system (DWAC), and upon receipt of the Shares, the Purchaser shall
cause payment therefor to be made to the Company's designated account by wire
transfer of immediately available funds provided that the Shares are received by
the Purchaser no later than 1:00 p.m., eastern time, or next day available funds
if the Shares are received thereafter.
(k) If on the Settlement Date, the Company fails to deliver the Shares to
be purchased by the Purchaser, and such failure continues for ten (10) trading
days, the Company shall pay, in cash or restricted shares of Common Stock
(subject to the Company's compliance with applicable securities laws), at the
option of the Purchaser, as liquidated damages and not as a penalty, to the
Purchaser an amount equal to two percent (2%) of the Draw Down Amount for the
initial thirty (30) days and each additional thirty (30) day period thereafter
until such failure has been cured, which shall be pro rated for such periods
less than thirty (30) days (the "Periodic Amount"). Cash payments to be made
pursuant to this Section 6.1(k) shall be due and payable immediately upon demand
in immediately available cash funds. Certificates evidencing the restricted
shares of Common Stock shall be delivered immediately upon demand. The parties
agree that the Periodic Amount represents a reasonable estimate on the part of
the parties, as of the date of this Agreement, of the amount of damages that may
be incurred by the Purchaser if the Company fails to deliver the Shares on the
Settlement Date. If the Purchaser elects to receive shares of Common Stock
instead of cash, the Purchaser shall have the right to demand registration once
within twelve (12) months of the date of issuance of such shares of Common Stock
and piggyback registration rights if the Company files a separate registration
statement.
(l) Average Volume Option. Upon receipt of a Draw Down Notice, the
Purchaser, in its sole discretion, may increase the Draw Down Amount stated in
such Draw Down Notice by (i) 25% if the average volume for the 10 trading days
preceding the date of the Draw Down Notice of the Company's Common Stock (the
"Average Volume") exceeds 200,000 shares per day; (ii) 50% if the Average Volume
exceeds 400,000 shares per day; and 75% if the Average Volume exceeds 600,000
shares per day.
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(m) Escrow. Prior to issuing a Draw Down Notice, the Company shall place in
escrow, with an entity designated by the Purchaser (the "Escrow Agent"), such
number of shares of Common Stock as will equal the maximum number of Shares
which the Purchaser could purchase during the Draw Down Pricing Period. The
shares of Common Stock subject to such escrow shall be released by the Escrow
Agent to the Purchaser only in the event the Company fails to deliver the Shares
on the relevant Settlement Date. The Purchaser's obligation to purchase the
Shares on the Settlement Date shall be contingent upon the fulfillment of the
Company of the escrow requirements contained in this Section 6.1(m). The
Purchaser may, at its sole discretion, waive the escrow requirements contained
in this Section 6.1(m) at any time prior to the relevant Settlement Date.
ARTICLE VII
Legends
Section 7.1 Legend. Unless otherwise provided below, each certificate
representing the Shares and the shares of Common Stock issuable upon exercise of
the Warrants shall be stamped or otherwise imprinted with a legend substantially
in the following form (the "Legend"):
THESE SECURITIES REPRESENTED BY THIS CERTIFICATE (THE
"SECURITIES") HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED (THE "SECURITIES ACT") OR ANY STATE
SECURITIES LAWS AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE
DISPOSED OF UNLESS REGISTERED UNDER THAT ACT AND UNDER
APPLICABLE STATE SECURITIES LAWS OR MAGNITUDE INFORMATION
SYSTEMS, INC. (THE "COMPANY") SHALL HAVE RECEIVED AN OPINION OF
ITS COUNSEL THAT REGISTRATION OF SUCH SECURITIES UNDER THAT ACT
AND UNDER THE PROVISIONS OF APPLICABLE STATE SECURITIES LAWS IS
NOT REQUIRED.
As soon as practicable after the execution and delivery hereof, the
Company shall issue to the transfer agent instructions in substantially the form
of Exhibit D hereto. Such instructions shall be irrevocable by the Company from
and after the date thereof or from and after the issuance thereof. It is the
intent and purpose of such instructions, as provided therein, to require the
transfer agent to issue to the Purchaser, at the Purchaser's option, via DWAC or
in the form of certificates evidencing the Shares incident to a Draw Down and
issued on a Settlement Date, free of the Legend, without consultation by the
transfer agent with the Company or its counsel and without the need for any
further advice or instruction or documentation to the Transfer Agent by or from
the Company or its counsel or the Purchaser; provided, that (a) the Registration
Statement shall then be effective, (b) the Purchaser confirms to the transfer
agent and the Company that it has or intends to sell such Shares to a third
party that is not an affiliate of the Purchaser or the Company and the Purchaser
agrees to redeliver the certificate representing such Shares to the transfer
agent to add the Legend in the event the Shares are not sold, and (c) if
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reasonably requested by the transfer agent or the Company, the Purchaser
confirms to the transfer agent and the Company that the Purchaser has complied
with the prospectus delivery requirement under the Securities Act. At any time
after the date the Registration Statement has been declared effective by the
Commission, upon surrender of one or more certificates evidencing Common Stock
that bear the Legend, to the extent accompanied by a notice requesting the
issuance of new certificates free of the Legend to replace those surrendered,
the transfer agent shall reissue such shares of common stock via DWAC or free of
Legend. If the transfer agent fails to deliver the Shares on the Settlement
Date, then the Company shall pay liquidated damages to the Purchaser in the
amount of 2% of the purchase price of the Shares to be delivered on such
Settlement Date.
Section 7.2 No Other Legend or Stock Transfer Restrictions. No legend other
than the one specified in Section 7.1 has been or shall be placed on the share
certificates representing the Shares and the shares of Common Stock issuable
upon exercise of the Warrants and no instructions or "stop transfer orders," so
called, "stock transfer restrictions," or other restrictions have been or shall
be given to the Company's transfer agent with respect thereto other than as
expressly set forth in this Article VII.
Section 7.3 Purchaser's Compliance. Nothing in this Article VII shall
affect in any way the Purchaser's obligations under any agreement to comply with
all applicable securities laws upon resale of the Shares and the shares of
Common Stock issuable upon exercise of the Warrants.
ARTICLE VIII
Termination
Section 8.1 Termination by Mutual Consent. The term of this Agreement shall
be fifteen (15) months from the date on which the Commission declares the
Registration Statement effective (the "Investment Period"). This Agreement may
be terminated at any time by mutual consent of the parties.
Section 8.2 Other Termination. The Purchaser may terminate this Agreement
upon one (1) day's notice if (i) an event resulting in a Material Adverse Effect
has occurred, (ii) there shall occur any stop order or suspension of the
effectiveness of the Registration Statement for an aggregate of five (5) trading
days during the Investment Period, for any reason other than deferrals or
suspension during a blackout period as a result of corporate developments
subsequent to the Closing Date that would require such Registration Statement to
be amended to reflect such event in order to maintain its compliance with the
disclosure requirements of the Securities Act, (iii) the Registration Statement
is not declared effective within 120 days following the Filing Date, or (iv) the
Company shall at any time fail to comply with the requirements of Sections 4.2,
4.3 or 4.4 hereof. This Agreement shall terminate immediately upon the
occurrence of (x) a Discounted Financing other than a financing involving the
issuance of (1) Common Stock, (2) securities convertible, exercisable or
exchangeable into Common Stock or (3) Common Stock or securities convertible
into Common Stock together with warrants at a fixed future market price together
resulting in a discount not greater than 25% to the then current market price of
the Common Stock, (y) a
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Material Change in Ownership or (z) the Purchaser shall fail to comply with
Section 3.2(g); provided, however, that if a Terminating Event occurs during a
Draw Down Pricing Period, this Agreement shall terminate on the final Settlement
Date for such Draw Down Pricing Period. If this Agreement is terminated pursuant
to clause (x) of this Section 8.2, the Company nonetheless shall be obligated to
pay all of the applicable fees pursuant to Section 10.1 hereof. Section 8.3
Effect of Termination. In the event of termination by the Company or the
Purchaser, written notice thereof shall forthwith be given to the other party
and the transactions contemplated by this Agreement shall be terminated without
further action by either party. If this Agreement is terminated as provided in
Section 8.1 or 8.2 herein, this Agreement shall become void and of no further
force and effect, except as provided in Section 10.9. Nothing in this Section
8.3 shall be deemed to release the Company or the Purchaser from any liability
for any breach under this Agreement, or to impair the rights of the Company and
the Purchaser to compel specific performance by the other party of its
obligations under this Agreement.
ARTICLE IX
Indemnification
Section 9.1 General Indemnity. (a) Indemnification by the Company. The
Company will indemnify and hold harmless the Purchaser and each person, if any,
who controls the Purchaser within the meaning of Section 15 of the Securities
Act or Section 20(a) of the Exchange Act from and against any losses, claims,
damages, liabilities and expenses (including reasonable costs of defense and
investigation and all reasonable attorney's fees) to which the Purchaser and
each person, if any, who controls the Purchaser may become subject, under the
Securities Act or otherwise, insofar as such losses, claims, damages,
liabilities and expenses (or actions in respect thereof) arise out of or are
based upon, (i) any untrue statement or alleged untrue statement of a material
fact contained, or incorporated by reference, in the Registration Statement or
the Prospectus relating to the shares being sold to the Purchaser, or any
amendment or supplement to it, or (ii) the omission or alleged omission to state
in that Registration Statement or any document incorporated by reference in the
Registration Statement, a material fact required to be stated therein or
necessary to make the statements therein not misleading, provided that the
Company shall not be liable under this Section 9.1(a) to the extent that a court
of competent jurisdiction shall have determined by a final judgment that such
loss, claim, damage, liability or action resulted directly from any such acts or
failures to act, undertaken or omitted to be taken by the Purchaser or such
person through its bad faith or willful misconduct; provided, however, that the
foregoing indemnity shall not apply to any loss, claim, damage, liability or
expense to the extent, but only to the extent, arising out of or based upon any
untrue statement or alleged untrue statement or omission or alleged omission
made in reliance upon and in conformity with written information furnished to
the Company by the Purchaser expressly for use in the Registration Statement,
any preliminary prospectus or the Prospectus (or any amendment or supplement
thereto).
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The Company will reimburse the Purchaser and each such controlling person
promptly upon demand for any legal or other costs or expenses reasonably
incurred by the Purchaser or the controlling person in investigating, defending
against, or preparing to defend against any such claim, action, suit or
proceeding, except that the Company will not be liable to the extent a claim or
action which results in a loss, claim, damage, liability or expense arises out
of, or is based upon, an untrue statement, alleged untrue statement, omission or
alleged omission, included in the Registration Statement or any Prospectus in
reliance upon, and in conformity with, written information furnished by the
Purchaser to the Company for inclusion in the Registration Statement or
Prospectus.
(b) Indemnification by the Purchaser. The Purchaser will indemnify and hold
harmless the Company, each of its directors and officers, and each person, if
any, who controls the Company within the meaning of Section 15 of the Securities
Act or Section 20(a) of the Exchange Act from and against any expenses
(including reasonable costs of defense and investigation and all reasonable
attorneys fees) to which the Company and any director or officer of the Company
and each person, if any, who controls the Company may become subject, under the
Securities Act or otherwise, insofar as such losses, claims, damages,
liabilities and expenses (or actions in respect thereof) arise out of or are
based upon, (i) any untrue statement or alleged untrue statement of a material
fact contained in any Prospectus or (ii) the omission or alleged omission to
state in the Registration Statement or any Prospectus a material fact required
to be stated therein or necessary to make the statements therein not misleading,
to the extent, but only to the extent, the untrue statement, alleged untrue
statement, omission or alleged omission was made in reliance upon, and in
conformity with, written information furnished by the Purchaser to the Company
for inclusion in the Registration Statement or Prospectus, and the Purchaser
will reimburse the Company and each such director, officer or controlling person
promptly upon demand for any legal or other costs or expenses reasonably
incurred by the Company or the other person in investigating, defending against,
or preparing to defend against any such claim, action, suit or proceeding.
Section 9.2 Indemnification Procedures. Promptly after a person receives
notice of a claim or the commencement of an action for which the person intends
to seek indemnification under paragraph (a) or (b) of Section 9.1, the person
will notify the indemnifying party in writing of the claim or commencement of
the action, suit or proceeding, but failure to notify the indemnifying party
will not relieve the indemnifying party from liability under paragraph (a) or
(b) of Section 9.1, except to the extent it has been materially prejudiced by
the failure to give notice. The indemnifying party will be entitled to
participate in the defense of any claim, action, suit or proceeding as to which
indemnification is being sought, and if the indemnifying party acknowledges in
writing the obligation to indemnify the party against whom the claim or action
is brought, the indemnifying party may (but will not be required to) assume the
defense against the claim, action, suit or proceeding with counsel satisfactory
to it. After an indemnifying party notifies an indemnified party that the
indemnifying party wishes to assume the defense of a claim, action, suit or
proceeding the indemnifying party will not be liable for any legal or other
expenses incurred by the indemnified party in connection with the defense
against the claim, action, suit or proceeding except that if, in the opinion of
counsel to the indemnifying party, one or more of the indemnified parties should
be separately represented in connection with a claim, action, suit or proceeding
the indemnifying party will pay the reasonable fees and expenses of one separate
counsel for the indemnified parties. Each indemnified party, as a condition to
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receiving indemnification as provided in Paragraph (a) or (b) or Section 9.1,
will cooperate in all reasonable respects with the indemnifying party in the
defense of any action or claim as to which indemnification is sought. No
indemnifying party will be liable for any settlement of any action effected
without its prior written consent. No indemnifying party will, without the prior
written consent of the indemnified party, effect any settlement of a pending or
threatened action with respect to which an indemnified party is, or is informed
that it may be, made a party and for which it would be entitled to
indemnification, unless the settlement includes an unconditional release of the
indemnified party from all liability and claims which are the subject matter of
the pending or threatened action.
If for any reason the indemnification provided for in this Agreement is
not available to, or is not sufficient to hold harmless, an indemnified party in
respect of any loss or liability referred to in paragraph (a) or (b) of Section
9.1, each indemnifying party will, in lieu of indemnifying the indemnified
party, contribute to the amount paid or payable by the indemnified party as a
result of the loss or liability, (i) in the proportion which is appropriate to
reflect the relative benefits received by the indemnifying party on the one hand
and by the indemnified party on the other from the sale of stock which is the
subject of the claim, action, suit or proceeding which resulted in the loss or
liability or (ii) if that allocation is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits of the
sale of stock, but also the relative fault of the indemnifying party and the
indemnified party with respect to the statements or omissions which are the
subject of the claim, action, suit or proceeding that resulted in the loss or
liability, as well as any other relevant equitable considerations.
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ARTICLE X
Miscellaneous
Section 10.1 Fees and Expenses. Except as set forth in Article IX, the
Company shall pay (i) all reasonable fees and expenses related to the
transactions contemplated by this Agreement; provided, that the Company shall
pay, at the Closing, all reasonable attorneys fees and expenses (exclusive of
disbursements and out-of-pocket expenses and reasonably itemized) incurred by
the Purchaser up to $50,000 in connection with the preparation, negotiation,
execution and delivery of this Agreement, (ii) all reasonable fees and expenses
incurred by the Purchaser in connection with any amendments, modifications or
waivers of this Agreement or incurred in connection with the enforcement of this
Agreement, including, without limitation, all reasonable attorneys fees and
expenses, and (iii) all stamp or other similar taxes and duties levied in
connection with issuance of the Shares pursuant hereto. In addition, if by the
seven (7) month anniversary of the commencement of the Investment Period the
Company has not requested Draw Down Amounts in an aggregate of $500,000, the
Company in its sole and absolute discretion shall either (x) pay to the
Purchaser a fee equal to $24,000 in cash or immediately available funds; or (y)
issue warrants to the Purchaser to purchase 24,000 shares of the Company's
Common Stock at an exercise price of 110% of the VWAP of the Common Stock on the
Closing Date.
Section 10.2 Specific Enforcement, Consent to Jurisdiction.
(a) The Company and the Purchaser acknowledge and agree that irreparable
damage would occur in the event that any of the provisions of this Agreement
were not performed in accordance with their specific terms or were otherwise
breached. It is accordingly agreed that the parties shall be entitled to an
injunction or injunctions to prevent or cure breaches of the provisions of this
Agreement and to enforce specifically the terms and provisions hereof or
thereof, this being in addition to any other remedy to which any of them may be
entitled by law or equity.
(b) Each of the Company and the Purchaser (i) hereby irrevocably submits to
the jurisdiction of the United States District Court and other courts of the
United States sitting in the State of New York for the purposes of any suit,
action or proceeding arising out of or relating to this Agreement and (ii)
hereby waives, and agrees not to assert in any such suit, action or proceeding,
any claim that it is not personally subject to the jurisdiction of such court,
that the suit, action or proceeding is brought in an inconvenient forum or that
the venue of the suit, action or proceeding is improper. Each of the Company and
the Purchaser consents to process being served in any such suit, action or
proceeding by mailing a copy thereof to such party at the address in effect for
notices to it under this Agreement and agrees that such service shall constitute
good and sufficient service of process and notice thereof. Nothing in this
Section 10.2 shall affect or limit any right to serve process in any other
manner permitted by law.
Section 10.3 Entire Agreement; Amendment. This Agreement contains the
entire understanding of the parties with respect to the matters covered hereby
and, except as specifically set forth herein, neither the Company nor the
Purchaser makes any representations, warranty, covenant or undertaking with
respect to such matters. No provision of this Agreement may be waived or amended
other than by a written instrument signed by the party against whom enforcement
of any such amendment or waiver is sought.
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Section 10.4 Notices. Any notice, demand, request, waiver or other
communication required or permitted to be given hereunder shall be in writing
and shall be effective (a) upon hand delivery, by telex (with correct answer
back received), telecopy or facsimile at the address or number designated below
(if delivered on a business day during normal business hours where such notice
is to be received), or the first business day following such delivery (if
delivered other than on a business day during normal business hours where such
notice is to be received) or (b) on the second business day following the date
of mailing by express courier service, fully prepaid, addressed to such address,
or upon actual receipt of such mailing, whichever shall first occur. The
addresses for such communications shall be:
If to the Company: MAGNITUDE INFORMATION SYSTEMS, INC.
401 Route 24
Chester, NJ 07930
Tel. No.: (908) 879-2722
Fax No.: (908) 879-7006
Attention: Steven D. Rudnik
With copies to: Joseph J. Tomasek, Esq.
77 North Bridge Street
Somerville, NJ 08876
Tel. No.: (908) 429-0030
Fax No.: (908) 429-0040
If to the Purchaser: Torneaux Fund Ltd.
Montague Sterling Street
East Bay Street
P.O. Box SS-6238
Nassau, Bahamas
Tel. No.: (242) 394-2700
Fax No.: (242) 394-8348
Attention: Director
With copies to: Parker Chapin LLP
The Chrysler Building
405 Lexington Avenue
New York, New York 10174
Tel. No.: (212) 704-6000
Fax No.: (212) 704-6288
Any party hereto may from time to time change its address for notices
by giving at least ten (10) days prior written notice of such changed address to
the other party hereto.
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Section 10.5 Waivers. No waiver by either party of any default with respect
to any provision, condition or requirement of this Agreement shall be deemed to
be a continuing waiver in the future or a waiver of any other provisions,
condition or requirement hereof, nor shall any delay or omission of any party to
exercise any right hereunder in any manner impair the exercise of any such right
accruing to it thereafter.
Section 10.6 Headings. The article, section and subsection headings in this
Agreement are for convenience only and shall not constitute a part of this
Agreement for any other purpose and shall not be deemed to limit or affect any
of the provisions hereof.
Section 10.7 Successors and Assigns. The Purchaser may not assign this
Agreement to any person without the prior written consent of the Company, which
consent will not be unreasonably withheld. This Agreement shall be binding upon
and inure to the benefit of the parties and their successors and assigns. After
Closing, the assignment by a party to this Agreement of any rights hereunder
shall not affect the obligations of such party under this Agreement.
Section 10.8 Governing Law. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of New York, without
giving effect to the choice of law provisions.
Section 10.9 Survival. The representations and warranties of the Company
and the Purchaser contained in Article III and the covenants contained in
Article IV shall survive the execution and delivery hereof and the Closing until
the termination of this Agreement, and the agreements and covenants set forth in
Article IX of this Agreement shall survive the execution and delivery hereof and
the Closing hereunder. Section 10.14 shall survive the termination of this
Agreement.
Section 10.10 Counterparts. This Agreement may be executed in any number of
counterparts, all of which taken together shall constitute one and the same
instrument and shall become effective when counterparts have been signed by each
party and delivered to the other parties hereto, it being understood that all
parties need not sign the same counterpart. In the event any signature is
delivered by facsimile transmission, the party using such means of delivery
shall cause four additional executed signature pages to be physically delivered
to the other parties within five (5) days of the execution and delivery hereof.
Section 10.11 Publicity. Except as required by applicable law, the Company
shall not issue any press release or otherwise make any public statement or
announcement with respect to this Agreement or the transactions contemplated
hereby or the existence of this Agreement without the prior consent of the
Purchaser.
Section 10.12 Severability. The provisions of this Agreement are severable
and, in the event that any court of competent jurisdiction shall determine that
any one or more of the provisions or part of the provisions contained in this
Agreement shall, for any reason, be held to be invalid, illegal or unenforceable
in any respect, such invalidity, illegality or unenforceability shall not affect
any other provision or part of a provision of this Agreement, and this Agreement
shall be reformed and construed as if such invalid or illegal or unenforceable
provision, or part of such provision, had never been contained herein, so that
such provisions would be valid, legal and enforceable to the maximum extent
possible.
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Section 10.13 Further Assurances. From and after the date of this
Agreement, upon the request of the Purchaser or the Company, each of the Company
and the Purchaser shall execute and deliver such instrument, documents and other
writings as may be reasonably necessary or desirable to confirm and carry out
and to effectuate fully the intent and purposes of this Agreement.
Section 10.14 Confidentiality. Purchaser agrees to maintain the
confidentiality of all information about the Company received from any officer,
employee or agent of the Company, until such time as that confidential
information is released to the public generally other than as a result of any
disclosure by Purchaser.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officer as of the date first above
written.
MAGNITUDE INFORMATION SYSTEMS, INC.
By: /s/ Steven D. Rudnik
Steven D. Rudnik, President and CEO
TORNEAUX FUND LTD.
By: /s/ Rhonda McDeigan-Eldridge
Name: Rhonda McDeigan-Eldridge
Title: President
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EXHIBIT A TO THE
COMMON STOCK PURCHASE AGREEMENT
OPINION OF COUNSEL
Joseph J. Tomasek
Attorney At Law
75-77 North Bridge Street
Somerville, New Jersey 08876
October 31, 2000
Torneaux Fund Ltd.
Montague Sterling Street
East Bay Street
P. O. Box SS-6238
Nassau, Bahamas
Attn: Director
Re: Opinion of Counsel
Common Stock Purchase Agreement, Dated
as of October 6, 2000, By and Between
Magnitude Information Systems, Inc. and
Torneaux Fund Ltd.
Dear Mr. Director:
I have acted as counsel to Magnitude Information Systems, Inc. (the
"Company") in connection with its execution and delivery of a certain Common
Stock Purchase Agreement, dated as of October 6, 2000 (the "Purchase
Agreement"), pursuant to the general terms of which the Company may sell and
Torneaux Fund Ltd. (the "Purchaser") may purchase up to 3,579,545 shares of the
common stock of the Company (the "Common Stock") through a combination of direct
purchases and exercise of certain Company Common Stock warrants (the "Warrants"
and the "Warrant Shares", respectively).
I have examined such corporate records, certificates and other
documents as I have considered necessary or appropriate for the purposes of this
opinion. In such examination, I have assumed the genuineness of all signatures
and the authenticity of all documents submitted to me as copies. In examining
agreements executed by parties other than the Company, I have assumed that such
parties had the power, corporate or other, to enter into and perform all
obligations thereunder and also have assumed the due authorization by all
requisite action, corporate or other, and execution and delivery by such parties
of such documents, and the validity and binding effect thereof. As to any facts
material to the opinion expressed herein which I have not independently verified
or established, I have relied upon statements and representations of officers
and representatives of the Company and others.
<PAGE>
Based upon such examination, I am of the opinion that:
1. The Company is a corporation duly incorporated, validly existing and in
good standing under the laws of the State of Delaware. The Company has the
requisite corporate power to own and operate its properties and assets, and to
carry on its business as presently conducted. The Company and each such
subsidiary is duly qualified to do business as a foreign corporation and is in
good standing in every jurisdiction in which the nature of the business
conducted or property owned by it makes such qualification necessary.
2. The Company has the requisite corporate power and authority to enter
into and perform its obligations under the Purchase Agreement and to issue and
sell the Common Stock, the Warrants and the Common Stock issuable upon exercise
of the Warrants (the "Warrant Shares"). The execution, delivery and performance
of the Purchase Agreement by the Company and the consummation by it of the
transactions contemplated thereby have been duly and validly authorized by all
necessary corporate action and no further consent or authorization of the
Company or its Board of Directors or stockholders is required. The Purchase
Agreement has been duly executed and delivered and constitutes a legal, valid
and binding obligation of the Company enforceable against the Company in
accordance with its terms. The Common Stock is not subject to preemptive rights
under the Company's certificate of incorporation or bylaws.
3. The Common Stock and the Warrants have been duly authorized and the
Common Stock, when delivered against payment in full as provided in the Purchase
Agreement, will be validly issued, fully paid and nonassessable. The Warrant
Shares have been duly authorized and reserved for issuance, and, when delivered
upon exercise or against payment in full as provided in the Warrants, will be
validly issued, fully paid and nonassessable.
4. The execution, delivery and performance of and compliance with the terms
of the Purchase Agreement and the consummation by the Company of the
transactions contemplated thereby (i) do not violate any provision of the
Company's certificate of incorporation or bylaws, (ii) conflict with, or
constitute a default (or an event which with notice or lapse of time or both
would become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation of, any material agreement, mortgage,
deed of trust, indenture, note, bond, license, lease agreement, instrument or
obligation to which the Company is a party, (iii) create or impose a lien,
charge or encumbrance on any property of the Company under any agreement or any
commitment to which the Company is a party or by which the Company is bound or
by which any of its respective properties or assets are bound, or (iv) result in
a violation of any federal, state, local or foreign statute, rule, regulation,
order, judgment or decree (including federal and state securities laws and
regulations) applicable to the Company or any of its subsidiaries or by which
any property or asset of the Company or any of its subsidiaries are bound or
affected, except, in all cases other than violations pursuant to clause (i)
above, for such conflicts, defaults, terminations, amendments, acceleration,
cancellations and violations as would not, individually or in the aggregate,
have a Material Adverse Effect.
<PAGE>
5. There is no action, suit, claim, investigation or proceeding pending or
threatened against the Company or any subsidiary which questions the validity of
this Agreement or the transactions contemplated hereby or any action taken or to
be taken pursuant hereto or thereto. There is no action, suit, claim,
investigation or proceeding pending or, to our knowledge, threatened, against or
involving the Company, any subsidiary or any of their respective properties or
assets and which, if adversely determined, is reasonably likely to result in a
Material Adverse Effect.
6. No consent, approval or authorization of or designation, declaration or
filing with any governmental authority on the part of the Company is required in
connection with the valid execution and delivery of the Purchase Agreement, or
the offer, sale or issuance of the Common Stock and the Warrants or the
consummation of any other transaction contemplated by the Purchase Agreement
(other than any filings which may be required to be made by the Company with the
Commission, or the OTC Bulletin Board or an Alternate Market subsequent to the
Closing, and, any registration statement which may be filed pursuant to the
Purchase Agreement).
7. The offer, issuance and sale of the Common Stock and the Warrants
pursuant to the Purchase Agreement, and the issuance of the Warrant Shares to
the Purchaser under the terms of the Purchase Agreement will be exempt from
registration under the Securities Act of 1933, as amended, pursuant to Rule 4(2)
thereunder.
8. The Company is not a "holding company" or a "public utility company" as
such terms are defined in the Public Utility Holding Company Act of 1935, as
amended. The Company is not, and as a result of and immediately upon Closing
will not be, an "investment company" or a company "controlled" by an "investment
company," within the meaning of the Investment Company Act of 1940, as amended.
This opinion may be relied upon by you exclusively and no other party
without my prior written consent and only in connection with the execution and
delivery of the Purchase Agreement.
Very truly yours,
/s/ Joseph J. Tomasek
Joseph J. Tomasek, Esq.
<PAGE>
EXHIBIT B
COMPLIANCE CERTIFICATE
In connection with the issuance of shares of common stock of
Magnitude Information Systems, Inc. (the "Company") pursuant to the Draw Dawn
Notice, dated ___________ delivered by the Company to Torneaux Fund Ltd. (the
"Purchaser") pursuant to Article VI of the Common Stock Purchase Agreement dated
October ____, 2000, by and between the Company and the Purchaser (the
"Agreement"), the undersigned hereby certifies as follows:
1. The undersigned is the duly elected Chief Executive Officer of the
Company.
2. The representations and warranties of the Company set forth in
Section 3.1 of the Agreement are true and correct in all material respects as
though made on and as of the date hereof, except for representations and
warranties that speak as of a particular date.
3. The Company has performed in all material respects all covenants and
agreements to be performed by the Company on or prior to the Draw Down Exercise
Date and the Settlement Date related to the Draw Down Notice and has complied in
all material respects with all obligations and conditions contained in Section
5.3 of the Agreement.
The terms used herein but not defined herein shall have the
meanings specified in the Agreement.
The undersigned has executed this Certificate this _______
day of _________, 2000.
By:________________________________
Name: Steven D. Rudnik
Title: President and CEO
<PAGE>
EXHIBIT C
TO THE COMMON STOCK PURCHASE AGREEMENT
FORM OF
DRAW DOWN NOTICE
Reference is made to the Common Stock Purchase Agreement dated as of
October 6, 2000 (the "Purchase Agreement ") between Magnitude Information
Systems, Inc., a Delaware corporation (the "Company") and Torneaux Fund Ltd.
Capitalized terms used and not otherwise defined herein shall have the meanings
given such terms in the Purchase Agreement.
In accordance with and pursuant to Section 6.1 of the Purchase
Agreement, the Company hereby issues this Draw Down Notice to exercise a Draw
Down request for the Draw Down Amount indicated below.
Draw Down Amount:
Draw Down Pricing Period start date:
Draw Down Pricing Period end date:
Settlement Date No. 1:
Settlement Date No. 2:
Threshold Price:
Minimum Threshold Price: $1.00
Dated:
--------------------------------
By:______________________________
Steven D. Rudnik, President and CEO
Address:
Facsimile No.:
Wire Instructions:__________________
Contact Name: _________
<PAGE>
DISCLOSURE SCHEDULES
RELATING TO THE COMMON STOCK
PURCHASE AGREEMENT, DATED AS OF OCTOBER 6, 2000 BETWEEN
MAGNITUDE INFORMATION SYSTEMS, INC. AND
TORNEAUX FUND LTD.
ALL SECTION AND SUBSECTION NUMBERS AND LETTERS RELATE AND COINCIDE TO
SUCH NUMBERS AND LETTERS AS SET FORTH IN THE COMMON STOCK PURCHASE AGREEMENT
(THE "AGREEMENT"). ANY TERMS REQUIRING DEFINITION HEREIN ARE DEFINED IN THE
AGREEMENT.
ALL REPRESENTATIONS AND WARRANTIES SET FORTH IN THE AGREEMENT ARE
MODIFIED IN THEIR ENTIRETY BY THESE DISCLOSURE SCHEDULES. THE DISCLOSURES
CONTAINED IN THESE DISCLOSURE SCHEDULES SHALL BE READ IN THEIR ENTIRETY, AND ALL
THE DISCLOSURES SHALL BE READ TOGETHER.
<PAGE>
SCHEDULE 3.1(c)
Capitalization
Authorized and Issued Stock as of October 24, 2000: Preferred Stock 3,000,000
shares authorized, $0.001 par value.
2,500 shares are designated Cumulative Preferred Stock, of which 1
share is issued and outstanding; 300,000 shares are designated Series A
Senior Convertible Preferred Stock, of which 29,300 shares are issued
and outstanding; 350,000 shares are designated Series B Senior
Convertible Preferred Stock, of which 305,592 shares are issued and
outstanding; 120,000 shares are designated Series C Senior Convertible
Preferred Stock, of which 100,000 shares are issued and outstanding.
500,000 shares are designated Series D Senior Convertible Preferred
Stock, of which 55,556 shares are issued and outstanding.
Common Stock
100,000,000 shares authorized, $0.0001 par value.
16,315,240 shares are issued and outstanding.
Common Stock Shares registered with SB-2 Filing 8/24/00 (exclusive of common
shares already issued which are included in above figure):
Common shares, to be issued under existing agreements - 150,000 shares
Common shares underlying convertible notes - 749,780 shares
Common shares underlying Series B Convertible Preferred Stock already
issued -3,055,920 shares Common shares underlying Series C Convertible
Preferred Stock already issued -1,000,000 shares Common shares
underlying stock options - 3,324,866 shares Common shares underlying
warrants - 6,189,356 shares
Other Common Stock Issuable (exclusive of those registered with SB-2 of
8/24/00 above): Common shares to be issued under existing agreements -
341,166 shares Common shares underlying stock options already issued -
1,709,000 shares Common shares underlying warrants already issued -
1,016,486 shares Common shares underlying Series A Convertible
Preferred Stock already issued - 118,298 shares Common shares
underlying Series D Convertible Preferred Stock already issued -
555,560 shares Common shares underlying Series D Convertible Preferred
Stock to be issued
under the current round of financing - 1,666,672 shares
Common shares underlying warrants to be issued under the current round
of financing - 1,666,672 shares
Common shares underlying 2000 Stock Incentive Plan (to be registered) -
5,000,000 shares Common Shares issuable under Sales Representation
Agreement with Pacific Basin Marketing Company (estimated during
"Investment Period" for services rendered, To be in the 100,000 to
250,000 share range).
<PAGE>
SCHEDULE 3.1(g)
Subsidiaries
Name of Entity State of Incorporation Ownership
Magnitude, Inc. Delaware 99.1% owned by the Company
Magnitude Software, Inc. Delaware 100% owned by the Company
<PAGE>
SCHEDULE 3.1.(k)
Certain Indebtedness
Promissory note for $75,000 issued on December 4, 1996, with a due date of
December 4, 1998. The payee has not been located by the Company. The
indebtedness is carried on the Company's books as a current liability.
Promissory note for $25,000 issued in June 1995, with due date of 12 months
after issuance. The payee has not been located by the Company. The
indebtedness is carried on the Company's books as a current liability.
<PAGE>
SCHEDULE 3.1(w)
Employees
State of Incorporation
Subsidiary or Organization Ownership
<PAGE>
EXHIBIT D
TRANSFER AGENT INSTRUCTIONS
________________, 2000
Securities Transfer Company
16910 Dallas Parkway, Suite 10
Dallas, TX 75248
Ladies & Gentlemen:
Reference is made to that certain Common Stock Purchase Agreement (the
"Agreement") between MAGNITUDE INFORMATION SYSTEMS, INC., a Delaware corporation
(the "Company"), and the buyer named therein (the "Purchaser") pursuant to which
the Company is issuing to the Purchaser shares (the "Shares") of the Company's
common stock, $0.0001 par value per share (the "Common Stock") and certain
warrants (the "Warrants") which shall be exercisable into shares of Common
Stock. The shares of Common Stock issuable upon exercise of the Warrants are
referred to herein as "Warrant Shares." The Shares and Warrant Shares are
collectively referred to herein as "Underlying Shares."
This letter shall serve as our irrevocable authorization and direction
to you (provided that you are the transfer agent for the Company with respect to
its Common Stock at such time) to issue Underlying Shares from time to time upon
notice from the Company to issue such Underlying Shares. So long as you have
previously received (x) a written confirmation from the Company's outside
counsel substantially in the form of Exhibit I attached hereto (which the
Company shall direct be delivered to you by such outside counsel upon the
effectiveness of the registration statement covering resales of Underlying
Shares) stating that a registration statement covering resales of Underlying
Shares has been declared effective by the Securities and Exchange Commission
under the Securities Act of 1933, as amended, and that Underlying Shares may be
issued (or reissued if they have been issued at a time when there was not such
an effective registration statement) or resold without any restrictive legend
(the "Notice of Effectiveness"), (y) a copy of such registration statement and
(z) an appropriate representation that the resale prospectus contained in the
registration statement has been delivered in compliance with applicable rules
and regulations, then certificates representing Underlying Shares shall not bear
any legend restricting transfer of Underlying Shares thereby and should not be
subject to any stop-transfer restriction. Provided, however, that if you have
not previously received a copy of the Notice of Effectiveness, such registration
statement and such representation, then certificates representing Underlying
Shares shall bear the following legend:
<PAGE>
THESE SECURITIES HAVE NOT BEEN REGISTERED WITH THE SECURITIES
AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY
STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"),
AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT
TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES
ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A
TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF
THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE
SECURITIES LAWS.
and, provided, further, that the Company may, from time to time, notify you to
place stop-transfer restrictions on the certificates for Underlying Shares in
the event, but only in the event, a registration statement covering Underlying
Shares is subject to amendment for events then current.
Please be advised that the Purchaser has relied upon this instruction
letter as an inducement to enter into the Agreement and, accordingly, the
Purchaser is a third party beneficiary to these instructions.
Please execute this letter in the space indicated to acknowledge your
agreement to act in accordance with these instructions. Should you have any
questions concerning this matter, please contact me at ______________________.
Very truly yours,
MAGNITUDE INFORMATION SYSTEMS, INC.
By: ________________________________
Name: ________________________
Title: _______________________
ACKNOWLEDGED AND AGREED:
______[TRANSFER AGENT]_________
By: _________________________________
Name: _________________________
Title: __________________________
Tel.: ___________________________
<PAGE>
Exhibit I
[FORM OF NOTICE OF EFFECTIVENESS OF OUTSIDE COUNSEL]
[Addressee]
[Address]
TO WHOM IT MAY CONCERN:
We are counsel to Magnitude Information Systems, Inc., a Delaware
corporation (the "Company"), and have represented the Company in connection with
that certain Common Stock Purchase Agreement (the "Agreement") between the
Company and the Purchaser named therein, pursuant to which the Company agreed to
issue shares of its common stock (the "Common Stock") and warrants to purchase
shares of the Common Stock (the "Warrant Shares"). Pursuant to the Agreement,
the Company agreed to register the Common Stock and the Warrant Shares.
In connection with the foregoing, we advise you that the Registration
Statement on Form ____ (File No. 333-______________) of the Company (the
"Registration Statement"), a copy of which is enclosed, was declared effective
at ____________M. Eastern Time on ____________, 2000. Upon issuance of the
Underlying Shares referred to in the Company's instruction letter attached, and
provided that you have received a copy of the representation pursuant to item
(z) in the second paragraph of such instruction letter, you are authorized to
issue certificates for the Company's common stock without restrictive legends.
No stop order suspending the effectiveness of the Registration Statement
covering any or _________ ________________________.
Very truly yours,
<PAGE>
Exhibit 4.26
FORM OF WARRANT
THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE
HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS AND MAY NOT BE SOLD,
TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF UNLESS REGISTERED UNDER THE
SECURITIES ACT AND UNDER APPLICABLE STATE SECURITIES LAWS OR MAGNITUDE
INFORMATION SYSTEMS, INC., A DELAWARE CORPORATION (THE "COMPANY"), SHALL HAVE
RECEIVED AN OPINION, IN FORM, SCOPE AND SUBSTANCE REASONABLY ACCEPTABLE TO THE
COMPANY, OF COUNSEL WHO IS REASONABLY ACCEPTABLE TO THE COMPANY, THAT
REGISTRATION OF SUCH SECURITIES UNDER THE SECURITIES ACT AND UNDER THE
PROVISIONS OF APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED.
WARRANT TO PURCHASE
SHARES OF COMMON STOCK
OF
MAGNITUDE INFORMATION SYSTEMS, INC.
Expires: November __, 2003
No.: W-__ Number of Shares: _____
Date of Issuance: November __, 2000
FOR VALUE RECEIVED, subject to the provisions hereinafter set forth,
the undersigned, Magnitude Information Systems, Inc., a Delaware corporation
(together with its successors and assigns, the "Issuer"), hereby certifies that
Torneaux Ltd. or its registered assigns is entitled to subscribe for and
purchase, during the period specified in this Warrant, up to 1,193,181 shares
(subject to adjustment as hereinafter provided) of the duly authorized, validly
issued, fully paid and non-assessable Common Stock of the Issuer, at an exercise
price per share equal to the Warrant Price then in effect, subject, however, to
the provisions and upon the terms and conditions hereinafter set forth.
Capitalized terms used in this Warrant and not otherwise defined herein shall
have the respective meanings specified in Section 7 hereof.
1. Term. The right to subscribe for and purchase shares of Warrant Stock
represented hereby shall commence on the date of issuance of this Warrant and
shall expire at 5:00 p.m., eastern time, on [November __], 2003 (such period
being the "Term"); provided, however, that the exercise of this Warrant shall be
subject to the following limitations:
<PAGE>
(i) the right to subscribe for and purchase the first [_______] shares
(subject to adjustment as hereinafter provided) of Warrant Stock pursuant to the
exercise of a portion of this Warrant shall be immediately granted to the Holder
as of the date of this Warrant, subject to the exercise of all prior Warrants
and the sale of the shares of Common Stock underlying such Warrants (the "First
Exercise");
(ii) the right to subscribe for and purchase the next [_______] shares
(subject to adjustment as hereinafter provided) of Warrant Stock pursuant to the
exercise of a portion of this Warrant shall be immediately granted to the Holder
upon the sale of that number of shares of Common Stock purchased pursuant to the
First Exercise (the "Second Exercise");
(iii) the right to subscribe for and purchase the next [_______] shares
(subject to adjustment as hereinafter provided) of Warrant Stock pursuant to the
exercise of a portion of this Warrant shall be immediately granted to the Holder
upon the sale of that number of shares of Common Stock purchased pursuant to the
Second Exercise (the "Third Exercise"); and
(iv) the right to subscribe for and purchase the final [_______] shares
(subject to adjustment as hereinafter provided) of Warrant Stock pursuant to the
exercise of the remaining portion of this Warrant shall be immediately granted
to the Holder upon the sale of that number of shares of Common Stock purchased
pursuant to the Third Exercise.
2. Method of Exercise Payment; Issuance of New Warrant; Transfer and
Exchange.
(a) Time of Exercise. The purchase rights represented by this Warrant may
be exercised in whole or in part at any time and from time to time during the
Term.
(b) Method of Exercise. The Holder hereof may exercise this Warrant, in
whole or in part, by the surrender of this Warrant (with the exercise form
attached hereto duly executed) at the principal office of the Issuer, and by the
payment to the Issuer of an amount of consideration therefor equal to the
Warrant Price in effect on the date of such exercise multiplied by the number of
shares of Warrant Stock with respect to which this Warrant is then being
exercised, payable at such Holder's election (i) by certified or official bank
check or (ii) by surrender to the Issuer for cancellation of a portion of this
Warrant representing that number of unissued shares of Warrant Stock which is
equal to the quotient obtained by dividing (A) the product obtained by
multiplying the Warrant Price by the number of shares of Warrant Stock being
purchased upon such exercise by (B) the difference obtained by subtracting the
Warrant Price from the Per Share Market Value as of the date of such exercise,
or (iii) by a combination of the foregoing methods of payment selected by the
Holder of this Warrant. In any case where the consideration payable upon such
exercise is being paid in whole or in part pursuant to the provisions of clause
(ii) of this subsection (b), such exercise shall be accompanied by written
notice from the Holder of this Warrant specifying the manner of payment thereof
and containing a calculation showing the number of shares of Warrant Stock with
respect to which rights are being surrendered thereunder and the net number of
shares of Common Stock to be issued after giving effect to such surrender.
-2-
<PAGE>
(c) Issuance of Stock Certificates. In the event of any exercise of the
rights represented by this Warrant in accordance with and subject to the terms
and conditions hereof, (i) certificates for the shares of Warrant Stock so
purchased shall be dated the date of such exercise and delivered to the Holder
hereof within a reasonable time, not exceeding three (3) Trading Days after such
exercise, and the Holder hereof shall be deemed for all purposes to be the
Holder of the shares of Warrant Stock so purchased as of the date of such
exercise, and (ii) unless this Warrant has expired, a new Warrant representing
the number of shares of Warrant Stock, if any, with respect to which this
Warrant shall not then have been exercised (less any amount thereof which shall
have been canceled in payment or partial payment of the Warrant Price as
hereinabove provided) shall also be issued to the Holder hereof at the Issuer's
expense within such time.
(d) Transferability of Warrant. Subject to Section 2(e), this Warrant may
be transferred by a Holder without the consent of the Issuer. If transferred
pursuant to this subsection and subject to the provisions of subsection (e) of
this Section 2, this Warrant may be transferred on the books of the Issuer by
the Holder hereof in person or by duly authorized attorney, upon surrender of
this Warrant at the principal office of the Issuer, properly endorsed (by the
Holder executing an assignment in the form attached hereto) and upon payment of
any necessary transfer tax imposed upon such transfer. This Warrant is
exchangeable at the principal office of the Issuer for Warrants for the purchase
of the same aggregate number of shares of Warrant Stock, each new Warrant to
represent the right to purchase such number of shares of Warrant Stock as the
Holder hereof shall designate at the time of such exchange. All Warrants issued
on transfers or exchanges shall be dated the Original Issue Date and shall be
identical with this Warrant except as to the number of shares of Warrant Stock
issuable pursuant hereto.
(e) Compliance with Securities Laws.
(i) The Holder of this Warrant, by acceptance hereof, acknowledges that
this Warrant or the shares of Warrant Stock to be issued upon exercise hereof
are being acquired solely for the Holder's own account and not as a nominee for
any other party, and for investment, and that the Holder will not offer, sell or
otherwise dispose of this Warrant or any shares of Warrant Stock to be issued
upon exercise hereof except pursuant to an effective registration statement, or
an exemption from registration, under the Securities Act and any applicable
state securities laws.
(ii) Except as provided in paragraph (iii) below, this Warrant and all
certificates representing shares of Warrant Stock issued upon exercise hereof
shall be stamped or imprinted with a legend in substantially the following form:
THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON
EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE
SECURITIES LAWS AND MAY NOT BE SOLD, TRANSFERRED, PLEDGED OR
OTHERWISE DISPOSED OF UNLESS REGISTERED UNDER THE SECURITIES
ACT AND UNDER APPLICABLE STATE SECURITIES LAWS OR MAGNITUDE
-3-
<PAGE>
INFORMATION SYSTEMS, INC., A DELAWARE CORPORATION (THE
"COMPANY"), SHALL HAVE RECEIVED AN OPINION, IN FORM, SCOPE AND
SUBSTANCE REASONABLY ACCEPTABLE TO THE COMPANY, OF COUNSEL WHO
IS REASONABLY ACCEPTABLE TO THE COMPANY, THAT REGISTRATION OF
SUCH SECURITIES UNDER THE SECURITIES ACT AND UNDER THE
PROVISIONS OF APPLICABLE STATE SECURITIES LAWS IS NOT
REQUIRED.
(iii) The restrictions imposed by this subsection (e) upon the transfer of
this Warrant or the shares of Warrant Stock to be purchased upon exercise hereof
shall terminate (A) when such securities shall have been resold pursuant to an
effective registration statement under the Securities Act, (B) upon the Issuer's
receipt of an opinion of counsel, in form and substance reasonably satisfactory
to the Issuer, addressed to the Issuer to the effect that such restrictions are
no longer required to ensure compliance with the Securities Act and state
securities laws or (C) upon the Issuer's receipt of other evidence reasonably
satisfactory to the Issuer that such registration and qualification under the
Securities Act and state securities laws are not required. Whenever such
restrictions shall cease and terminate as to any such securities, the Holder
thereof shall be entitled to receive from the Issuer (or its transfer agent and
registrar), without expense (other than applicable transfer taxes, if any), new
Warrants (or, in the case of shares of Warrant Stock, new stock certificates) of
like tenor not bearing the applicable legend required by paragraph (ii) above
relating to the Securities Act and applicable state securities laws.
(f) Continuing Rights of Holder. The Issuer will, at the time of or at any
time after each exercise of this Warrant, upon the request of the Holder hereof,
acknowledge in writing the extent, if any, of its continuing obligation to
afford to such Holder all rights to which such Holder shall continue to be
entitled after such exercise in accordance with the terms of this Warrant;
provided that if any such Holder shall fail to make any such request, the
failure shall not affect the continuing obligation of the Issuer to afford such
rights to such Holder.
3. Stock Fully Paid; Reservation and Listing of Shares; Covenants.
(a) Stock Fully Paid. The Issuer represents, warrants, covenants and agrees
that all shares of Warrant Stock which may be issued upon the exercise of this
Warrant or otherwise hereunder will, upon issuance, be duly authorized, validly
issued, fully paid and non-assessable and free from all taxes and liens,
security interest, charges and encumbrances of any nature whatsoever created by
or through the Issuer. The Issuer further represents, warrants, covenants and
agrees that during the period within which this Warrant may be exercised, the
Issuer will at all times have authorized and reserved for the purpose of the
issue upon exercise of this Warrant a sufficient number of shares of Common
Stock to provide for the exercise of this Warrant.
(b) Reservation. If any shares of Common Stock required to be reserved for
issuance upon exercise of this Warrant or as otherwise provided hereunder
require registration or qualification with any governmental authority under any
federal or state law before such shares may be so issued, the Issuer will in
good faith use its best efforts as expeditiously as possible at its expense to
cause such shares to be duly registered or qualified. If the Issuer shall list
-4-
<PAGE>
any shares of Common Stock on any securities exchange or market it will, at its
expense, list thereon, maintain and increase when necessary such listing, of,
all shares of Warrant Stock from time to time issued upon exercise of this
Warrant or as otherwise provided hereunder, and, to the extent permissible under
the applicable securities exchange rules, all unissued shares of Warrant Stock
which are at any time issuable hereunder, so long as any shares of Common Stock
shall be so listed. The Issuer will also so list on each securities exchange or
market, and will maintain such listing of, any other securities which the Holder
of this Warrant shall be entitled to receive upon the exercise of this Warrant
if at the time any securities of the same class shall be listed on such
securities exchange or market by the Issuer.
(c) Covenants. The Issuer shall not by any action including, without
limitation, amending the Certificate of Incorporation or the by-laws of the
Issuer, or through any reorganization, transfer of assets, consolidation,
merger, dissolution, issue or sale of securities or any other action, avoid or
seek to avoid the observance or performance of any of the terms or provisions of
this Warrant, but will at all times in good faith carry out all such terms or
provisions and take all such actions as may be necessary or appropriate to
protect the rights of the Holder hereof against dilution (to the extent
specifically provided herein) or impairment. Without limiting the generality of
the foregoing, the Issuer will (i) not permit the par value, if any, of its
Common Stock to exceed the then effective Warrant Price, (ii) not amend or
modify any provision of the Certificate of Incorporation or by-laws of the
Issuer in any manner that would adversely affect in any way the powers,
preferences or relative participating, optional or other special rights of the
Common Stock or which would adversely affect the rights of the Holders of the
Warrants, (iii) take all such action as may be reasonably necessary in order
that the Issuer may validly and legally issue fully paid and nonassessable
shares of Common Stock, free and clear of any liens, security interests,
charges, claims, encumbrances and restrictions (other than as provided herein)
upon the exercise of this Warrant, and (iv) obtain all such authorizations,
exemptions or consents from any public regulatory body having jurisdiction
thereof as may be necessary to enable the Issuer to perform its obligations
under this Warrant.
(d) Ten Percent Rule. This Warrant shall not be exercisable to the extent
that the shares of Common Stock issuable upon any exercise of hereof, when
aggregated with all other shares of Common Stock then owned by the Holder (as
defined in the Purchase Agreement), would result in the Holder owning more than
9.99% of all of such Common Stock as would be outstanding on such date of
exercise, as determined in accordance with Section 16 of the Securities Exchange
Act of 1934 and the regulations promulgated thereunder.
(e) Loss, Theft, Destruction of Warrants. Upon receipt of evidence
satisfactory to the Issuer of the ownership of and the loss, theft, destruction
or mutilation of any Warrant and, in the case of any such loss, theft or
destruction, upon receipt of indemnity or security satisfactory to the Issuer
or, in the case of any such mutilation, upon surrender and cancellation of such
Warrant, the Issuer will make and deliver, in lieu of such lost, stolen,
destroyed or mutilated Warrant, a new Warrant of like tenor and representing the
right to purchase the same number of shares of Common Stock.
4. Adjustment of Warrant Price and Warrant Share Number. The number and
kind of Securities purchasable upon the exercise of this Warrant and the Warrant
Price shall be subject to adjustment from time to time upon the happening of
certain events as follows:
-5-
<PAGE>
(a) Recapitalization, Reorganization, Reclassification, Consolidation,
Merger or Sale.
(i) In case the Issuer after the Original Issue Date shall do any of the
following (each, a "Triggering Event"): (a) consolidate with or merge into any
other Person and the Issuer shall not be the continuing or surviving Person of
such consolidation or merger, or (b) permit any other Person to consolidate with
or merge into the Issuer and the Issuer shall be the continuing or surviving
Person but, in connection with such consolidation or merger, any Capital Stock
of the Issuer shall be changed into or exchanged for Securities of any other
Person or cash or any other property, or (c) transfer all or substantially all
of its properties or assets to any other Person, or (d) effect a capital
reorganization or reclassification of its Capital Stock, then, and in the case
of each such Triggering Event, proper provision shall be made so that, upon the
basis and the terms and in the manner provided in this Warrant, the Holder of
this Warrant shall be entitled, at the option of such Holder, (x) upon the
exercise hereof at any time after the consummation of such Triggering Event, to
the extent this Warrant is not exercised prior to such Triggering Event, to
receive at the Warrant Price in effect at the time immediately prior to the
consummation of such Triggering Event in lieu of the Common Stock issuable upon
such exercise of this Warrant prior to such Triggering Event, the Securities,
cash and property to which such Holder would have been entitled upon the
consummation of such Triggering Event if such Holder had exercised the rights
represented by this Warrant immediately prior thereto, subject to adjustments
(subsequent to such corporate action) as nearly equivalent as possible to the
adjustments provided for in Section 4 hereof or (y) to sell this Warrant (or, at
such Holder's election, a portion hereof) concurrently with the Triggering Event
to the Person continuing after or surviving such Triggering Event, or to the
Issuer (if Issuer is the continuing or surviving Person) at a sales price equal
to the amount of cash, property and/or Securities to which a holder of the
number of shares of Common Stock which would otherwise have been delivered upon
the exercise of this Warrant would have been entitled upon the effective date or
closing of any such Triggering Event (the "Event Consideration"), less the
amount or portion of such Event Consideration having a fair value equal to the
aggregate Warrant Price applicable to this Warrant or the portion hereof so
sold.
(ii) Notwithstanding anything contained in this Warrant to the contrary,
the Issuer will not effect any Triggering Event unless, prior to the
consummation thereof, each Person (other than the Issuer) which may be required
to deliver any Securities, cash or property upon the exercise of this Warrant as
provided herein shall assume, by written instrument delivered to, and reasonably
satisfactory to, the Holder of this Warrant, (A) the obligations of the Issuer
under this Warrant (and if the Issuer shall survive the consummation of such
Triggering Event, such assumption shall be in addition to, and shall not release
the Issuer from, any continuing obligations of the Issuer under this Warrant)
and (B) the obligation to deliver to such Holder such shares of Securities, cash
or property as, in accordance with the foregoing provisions of this subsection
(a), such Holder shall be entitled to receive, and such Person shall have
similarly delivered to such Holder an opinion of counsel for such Person, which
counsel shall be reasonably satisfactory to such Holder, stating that this
Warrant shall thereafter continue in full force and effect and the terms hereof
(including, without limitation, all of the provisions of this subsection (a))
shall be applicable to the Securities, cash or property which such Person may be
required to deliver upon any exercise of this Warrant or the exercise of any
rights pursuant hereto.
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(iii) If with respect to any Triggering Event, the Holder of this Warrant
has exercised its right as provided in clause (y) of subparagraph (i) of this
subsection (a) to sell this Warrant or a portion thereof, the Issuer agrees that
as a condition to the consummation of any such Triggering Event the Issuer shall
secure such right of Holder to sell this Warrant to the Person continuing after
or surviving such Triggering Event and the Issuer shall not effect any such
Triggering Event unless upon or prior to the consummation thereof the amounts of
cash, property and/or Securities required under such clause (y) are delivered to
the Holder of this Warrant. The obligation of the Issuer to secure such right of
the Holder to sell this Warrant shall be subject to such Holder's cooperation
with the Issuer, including, without limitation, the giving of reasonable and
customary representations and warranties to the purchaser in connection with any
such sale. Prior notice of any Triggering Event shall be given to the Holder of
this Warrant in accordance with Section 11 hereof.
(b) Subdivision or Combination of Shares. If the Issuer, at any time while
this Warrant is outstanding, shall subdivide or combine any shares of Common
Stock, (i) in case of subdivision of shares, the Warrant Price shall be
proportionately reduced (as at the effective date of such subdivision or, if the
Issuer shall take a record of holders of its Common Stock for the purpose of so
subdividing, as at the applicable record date, whichever is earlier) to reflect
the increase in the total number of shares of Common Stock outstanding as a
result of such subdivision, or (ii) in the case of a combination of shares, the
Warrant Price shall be proportionately increased (as at the effective date of
such combination or, if the Issuer shall take a record of holders of its Common
Stock for the purpose of so combining, as at the applicable record date,
whichever is earlier) to reflect the reduction in the total number of shares of
Common Stock outstanding as a result of such combination.
(c) Certain Dividends and Distributions. If the Issuer, at any time while
this Warrant is outstanding, shall:
(i) Stock Dividends. Pay a dividend in, or make any other distribution to
its stockholders (without consideration therefor) of, shares of Common Stock,
the Warrant Price shall be adjusted, as at the date the Issuer shall take a
record of the holders of the Issuer's Capital Stock for the purpose of receiving
such dividend or other distribution (or if no such record is taken, as at the
date of such payment or other distribution), to that price determined by
multiplying the Warrant Price in effect immediately prior to such record date
(or if no such record is taken, then immediately prior to such payment or other
distribution), by a fraction (1) the numerator of which shall be the total
number of shares of Common Stock outstanding immediately prior to such dividend
or distribution, and (2) the denominator of which shall be the total number of
shares of Common Stock outstanding immediately after such dividend or
distribution (plus in the event that the Issuer paid cash for fractional shares,
the number of additional shares which would have been outstanding had the Issuer
issued fractional shares in connection with said dividends); or
(ii) Other Dividends. Pay a dividend on, or make any distribution of its
assets upon or with respect to (including, but not limited to, a distribution of
its property as a dividend in liquidation or partial liquidation or by way of
return of capital), the Common Stock (other than as described in clause (i) of
this subsection (c)), or in the event that the Company shall offer options or
rights to subscribe for shares of Common Stock, or issue any Common Stock
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Equivalents, to all of its holders of Common Stock, then on the record date for
such payment, distribution or offer or, in the absence of a record date, on the
date of such payment, distribution or offer, the Holder shall receive what the
Holder would have received had it exercised this Warrant in full immediately
prior to the record date of such payment, distribution or offer or, in the
absence of a record date, immediately prior to the date of such payment,
distribution or offer.
(d) Issuance of Additional Shares of Common Stock. If the Issuer, at any
time while this Warrant is outstanding, shall issue any Additional Shares of
Common Stock (otherwise than as provided in the foregoing subsections (a)
through (c) of this Section 4), at a price per share less than the Warrant Price
then in effect or less than the Per Share Market Value then in effect or without
consideration, then the Warrant Price upon each such issuance shall be adjusted
to that price (rounded to the nearest cent) determined by multiplying the
Warrant Price then in effect by a fraction:
(i) the numerator of which shall be equal to the sum of (A) the number of
shares of Common Stock outstanding immediately prior to the issuance of such
Additional Shares of Common Stock plus (B) the number of shares of Common Stock
(rounded to the nearest whole share) which the aggregate consideration for the
total number of such Additional Shares of Common Stock so issued would purchase
at a price per share equal to the greater of the Per Share Market Value then in
effect and the Warrant Price then in effect, and
(ii) the denominator of which shall be equal to the number of shares of
Common Stock outstanding immediately after the issuance of such Additional
Shares of Common Stock.
The provisions of this subsection (d) shall not apply under any of the
circumstances for which an adjustment is provided in subsections (a), (b) or (c)
of this Section 4. No adjustment of the Warrant Price shall be made under this
subsection (d) upon the issuance of any Additional Shares of Common Stock which
are issued pursuant to any Common Stock Equivalent if upon the issuance of such
Common Stock Equivalent (x) any adjustment shall have been made pursuant to
subsection (e) of this Section 4 or (y) no adjustment was required pursuant to
subsection (e) of this Section 4. No adjustment of the Warrant Price shall be
made under this subsection (d) in an amount less than $.01 per share, but any
such lesser adjustment shall be carried forward and shall be made at the time
and together with the next subsequent adjustment, if any, which together with
any adjustments so carried forward shall amount to $.01 per share or more;
provided that upon any adjustment of the Warrant Price as a result of any
dividend or distribution payable in Common Stock or Convertible Securities or
the reclassification, subdivision or combination of Common Stock into a greater
or smaller number of shares, the foregoing figure of $.01 per share (or such
figure as last adjusted) shall be adjusted (to the nearest one-half cent) in
proportion to the adjustment in the Warrant Price.
(e) Issuance of Common Stock Equivalents. If the Issuer, at any time while
this Warrant is outstanding, shall issue any Common Stock Equivalent and the
price per share for which Additional Shares of Common Stock may be issuable
thereafter pursuant to such Common Stock Equivalent shall be less than the
Warrant Price then in effect or less than the Per Share Market Value then in
effect, or if, after any such issuance of Common Stock Equivalents, the price
per share for which Additional Shares of Common Stock may be issuable thereafter
is amended or adjusted, and such price as so amended shall be less than the
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Warrant Price or less than the Per Share Market Value in effect at the time of
such amendment, then the Warrant Price upon each such issuance or amendment
shall be adjusted as provided in the first sentence of subsection (d) of this
Section 4 on the basis that (1) the maximum number of Additional Shares of
Common Stock issuable pursuant to all such Common Stock Equivalents shall be
deemed to have been issued (whether or not such Common Stock Equivalents are
actually then exercisable, convertible or exchangeable in whole or in part) as
of the earlier of (A) the date on which the Issuer shall enter into a firm
contract for the issuance of such Common Stock Equivalent, or (B) the date of
actual issuance of such Common Stock Equivalent, and (2) the aggregate
consideration for such maximum number of Additional Shares of Common Stock shall
be deemed to be the minimum consideration received or receivable by the Issuer
for the issuance of such Additional Shares of Common Stock pursuant to such
Common Stock Equivalent. No adjustment of the Warrant Price shall be made under
this subsection (e) upon the issuance of any Convertible Security which is
issued pursuant to the exercise of any warrants or other subscription or
purchase rights therefor, if any adjustment shall previously have been made in
the Warrant Price then in effect upon the issuance of such warrants or other
rights pursuant to this subsection (e). If no adjustment is required under this
subsection (e) upon issuance of any Common Stock Equivalent or once an
adjustment is made under this subsection (e) based upon the Per Share Market
Value in effect on the date of such adjustment, no further adjustment shall be
made under this subsection (e) based solely upon a change in the Per Share
Market Value after such date.
(f) Purchase of Common Stock by the Issuer. If the Issuer at any time while
this Warrant is outstanding shall, directly or indirectly through a Subsidiary
or otherwise, purchase, redeem or otherwise acquire any shares of Common Stock
at a price per share greater than the Per Share Market Value then in effect,
then the Warrant Price upon each such purchase, redemption or acquisition shall
be adjusted to that price determined by multiplying such Warrant Price by a
fraction (i) the numerator of which shall be the number of shares of Common
Stock outstanding immediately prior to such purchase, redemption or acquisition
minus the number of shares of Common Stock which the aggregate consideration for
the total number of such shares of Common Stock so purchased, redeemed or
acquired would purchase at the Per Share Market Value; and (ii) the denominator
of which shall be the number of shares of Common Stock outstanding immediately
after such purchase, redemption or acquisition. For the purposes of this
subsection (f), the date as of which the Per Share Market Value shall be
computed shall be the earlier of (x) the date on which the Issuer shall enter
into a firm contract for the purchase, redemption or acquisition of such Common
Stock, or (y) the date of actual purchase, redemption or acquisition of such
Common Stock. For the purposes of this subsection (f), a purchase, redemption or
acquisition of a Common Stock Equivalent shall be deemed to be a purchase of the
underlying Common Stock, and the computation herein required shall be made on
the basis of the full exercise, conversion or exchange of such Common Stock
Equivalent on the date as of which such computation is required hereby to be
made, whether or not such Common Stock Equivalent is actually exercisable,
convertible or exchangeable on such date.
(g) Other Provisions Applicable to Adjustments Under this Section 4. The
following provisions shall be applicable to the making of adjustments in the
Warrant Price hereinbefore provided in Section 4:
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(i) Computation of Consideration. The consideration received by the Issuer
shall be deemed to be the following: to the extent that any Additional Shares of
Common Stock or any Common Stock Equivalents shall be issued for a cash
consideration, the consideration received by the Issuer therefor, or if such
Additional Shares of Common Stock or Common Stock Equivalents are offered by the
Issuer for subscription, the subscription price, or, if such Additional Shares
of Common Stock or Common Stock Equivalents are sold to underwriters or dealers
for public offering without a subscription offering, the public offering price,
in any such case excluding any amounts paid or receivable for accrued interest
or accrued dividends and without deduction of any compensation, discounts,
commissions, or expenses paid or incurred by the Issuer for or in connection
with the underwriting thereof or otherwise in connection with the issue thereof;
to the extent that such issuance shall be for a consideration other than cash,
then, except as herein otherwise expressly provided, the fair market value of
such consideration at the, time of such issuance as determined in good faith by
the Board. The consideration for any Additional Shares of Common Stock issuable
pursuant to any Common Stock Equivalents shall be the consideration received by
the Issuer for issuing such Common Stock Equivalents, plus the additional
consideration payable to the Issuer upon the exercise, conversion or exchange of
such Common Stock Equivalents. In case of the issuance at any time of any
Additional Shares of Common Stock or Common Stock Equivalents in payment or
satisfaction of any dividend upon any class of Capital Stock of the Issuer other
than Common Stock, the Issuer shall be deemed to have received for such
Additional Shares of Common Stock or Common Stock Equivalents a consideration
equal to the amount of such dividend so paid or satisfied. In any case in which
the consideration to be received or paid shall be other than cash, the Board
shall notify the Holder of this Warrant of its determination of the fair market
value of such consideration prior to payment or accepting receipt thereof. If,
within thirty (30) days after receipt of said notice, the Majority Holders shall
notify the Board in writing of their objection to such determination, a
determination of the fair market value of such consideration shall be made by an
Independent Appraiser selected by the Majority Holders with the approval of the
Board (which approval shall not be unreasonably withheld), whose fees and
expenses shall be paid by the Issuer.
(ii) Readjustment of Warrant Price. Upon the expiration or termination of
the right to convert, exchange or exercise any Common Stock Equivalent the
issuance of which effected an adjustment in the Warrant Price, if such Common
Stock Equivalent shall not have been converted, exercised or exchanged in its
entirety, the number of shares of Common Stock deemed to be issued and
outstanding by reason of the fact that they were issuable upon conversion,
exchange or exercise of any such Common Stock Equivalent shall no longer be
computed as set forth above, and the Warrant Price shall forthwith be readjusted
and thereafter be the price which it would have been (but reflecting any other
adjustments in the Warrant Price made pursuant to the provisions of this Section
4 after the issuance of such Common Stock Equivalent) had the adjustment of the
Warrant Price been made in accordance with the issuance or sale of the number of
Additional Shares of Common Stock actually issued upon conversion, exchange or
issuance of such Common Stock Equivalent and thereupon only the number of
Additional Shares of Common Stock actually so issued shall be deemed to have
been issued and only the consideration actually received by the Issuer (computed
as in clause (i) of this subsection (g)) shall be deemed to have been received
by the Issuer.
(iii) Outstanding Common Stock. The number of shares of Common Stock at any
time outstanding shall (A) not include any shares thereof then directly or
indirectly owned or held by or for the account of the Issuer or any of its
Subsidiaries, and (B) be deemed to include all shares of Common Stock then
issuable upon conversion, exercise or exchange of any then outstanding Common
Stock Equivalents or any other evidences of Indebtedness, shares of Capital
Stock or other Securities which are or may be at any time convertible into or
exchangeable for shares of Common Stock or Other Common Stock.
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(h) Other Action Affecting Common Stock. In case after the Original Issue
Date the Issuer shall take any action affecting its Common Stock, other than an
action described in any of the foregoing subsections (a) through (g) of this
Section 4, inclusive, and the failure to make any adjustment would not fairly
protect the purchase rights represented by this Warrant in accordance with the
essential intent and principle of this Section 4, then the Warrant Price shall
be adjusted in such manner and at such time as the Board may in good faith
determine to be equitable in the circumstances.
(i) Adjustment of Warrant Share Number. Upon each adjustment in the Warrant
Price pursuant to any of the foregoing provisions of this Section 4, the Warrant
Share Number shall be adjusted, to the nearest one hundredth of a whole share,
to the product obtained by multiplying the Warrant Share Number immediately
prior to such adjustment in the Warrant Price by a fraction, the numerator of
which shall be the Warrant Price immediately before giving effect to such
adjustment and the denominator of which shall be the Warrant Price immediately
after giving effect to such adjustment. If the Issuer shall be in default under
any provision contained in Section 3 of this Warrant so that shares issued at
the Warrant Price adjusted in accordance with this Section 4 would not be
validly issued, the adjustment of the Warrant Share Number provided for in the
foregoing sentence shall nonetheless be made and the Holder of this Warrant
shall be entitled to purchase such greater number of shares at the lowest price
at which such shares may then be validly issued under applicable law. Such
exercise shall not constitute a waiver of any claim arising against the Issuer
by reason of its default under Section 3 of this Warrant.
(j) Form of Warrant after Adjustments. The form of this Warrant need not be
changed because of any adjustments in the Warrant Price or the number and kind
of Securities purchasable upon the exercise of this Warrant.
5. Notice of Adjustments. Whenever the Warrant Price or Warrant Share
Number shall be adjusted pursuant to Section 4 hereof (for purposes of this
Section 5, each an "adjustment"), the Issuer shall cause its Chief Financial
Officer to prepare and execute a certificate setting forth, in reasonable
detail, the event requiring the adjustment, the amount of the adjustment, the
method by which such adjustment was calculated (including a description of the
basis on which the Board made any determination hereunder), and the Warrant
Price and Warrant Share Number after giving effect to such adjustment, and shall
cause copies of such certificate to be delivered to the Holder of this Warrant
promptly after each adjustment. Any dispute between the Issuer and the Holder of
this Warrant with respect to the matters set forth in such certificate may at
the option of the Holder of this Warrant be submitted to one of the national
accounting firms currently known as the "big five" selected by the Holder,
provided that the Issuer shall have ten (10) days after receipt of notice from
such Holder of its selection of such firm to object thereto, in which case such
Holder shall select another such firm and the Issuer shall have no such right of
objection. The firm selected by the Holder of this Warrant as provided in the
preceding sentence shall be instructed to deliver a written opinion as to such
matters to the Issuer and such Holder within thirty (30) days after submission
to it of such dispute. Such opinion shall be final and binding on the parties
hereto. The fees and expenses of such accounting firm shall be paid by the
Issuer.
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6. Fractional Shares. No fractional shares of Warrant Stock will be issued
in connection with and exercise hereof, but in lieu of such fractional shares,
the Issuer shall make a cash payment therefor equal in amount to the product of
the applicable fraction multiplied by the Per Share Market Value then in effect.
7. Definitions. For the purposes of this Warrant, the following terms have
the following meanings:
"Additional Shares of Common Stock" means all shares of Common
Stock issued by the Issuer after the Original Issue Date, and all shares of
Other Common, if any, issued by the Issuer after the Original Issue Date, except
(i) the Warrant Stock, (ii) any shares of Common Stock issued to pursuant to the
Purchase Agreement, (iii) any shares of Common Stock issued pursuant to the
stock options, stock warrants, the Series A Senior Convertible Preferred Stock,
the Series B Senior Convertible Preferred Stock and the Series C Senior
Convertible Preferred Stock of the Issuer as well as the convertible debt of the
Issuer and Common Stock issued pursuant to the Issuer's 2000 Incentive Stock
Plan and the securities of the Issuer that may be placed in one or more private
placement transactions, all of which securities of the Issuer are set forth on
Schedule 3.1(c) of the Purchase Agreement.
"Board" shall mean the Board of Directors of the Issuer.
"Capital Stock" means and includes (i) any and all shares,
interests, participations or other equivalents of or interests in (however
designated) corporate stock, including, without limitation, shares of preferred
or preference stock, (ii) all partnership interests (whether general or limited)
in any Person which is a partnership, (iii) all membership interests or limited
liability company interests in any limited liability company, and (iv) all
equity or ownership interests in any Person of any other type.
"Certificate of Incorporation" means the Certificate of
Incorporation, as amended, of the Issuer as in effect on the Original Issue
Date, and as hereafter from time to time amended, modified, supplemented or
restated in accordance with the terms hereof and thereof and pursuant to
applicable law.
"Common Stock" means the Common Stock, $.0001 par value, of
the Issuer and any other Capital Stock into which such stock may hereafter be
changed.
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"Common Stock Equivalent" means any Convertible Security or
warrant, option or other right to subscribe for or purchase any Additional
Shares of Common Stock or any Convertible Security.
"Convertible Securities" means evidences of Indebtedness,
shares of Capital Stock or other Securities which are or may be at any time
convertible into or exchangeable for Additional Shares of Common Stock. The term
"Convertible Security" means one of the Convertible Securities.
"Governmental Authority" means any governmental, regulatory or
self-regulatory entity, department, body, official, authority, commission,
board, agency or instrumentality, whether federal, state or local, and whether
domestic or foreign.
"Holders" mean the Persons who shall from time to time
own any Warrant. The term "Holder" means one of the Holders.
"Independent Appraiser" means a nationally recognized or major
regional investment banking firm or firm of independent certified public
accountants of recognized standing (which may be the firm that regularly
examines the financial statements of the Issuer) that is regularly engaged in
the business of appraising the Capital Stock or assets of corporations or other
entities as going concerns, and which is not affiliated with either the Issuer
or the Holder of any Warrant.
"Issuer" means Magnitude Information Systems, Inc., a
Delaware corporation, and its successors.
"Majority Holders" means at any time the Holders of Warrants
exercisable for a majority of the shares of Warrant Stock issuable under the
Warrants at the time outstanding.
"Original Issue Date" means [November __], 2000.
"Other Common" means any other Capital Stock of the Issuer of
any class which shall be authorized at any time after the date of this Warrant
(other than Common Stock) and which shall have the right to participate in the
distribution of earnings and assets of the Issuer without limitation as to
amount.
"Person" means an individual, corporation, limited liability
company, partnership, joint stock company, trust, unincorporated organization,
joint venture, Governmental Authority or other entity of whatever nature.
"Per Share Market Value" means on any particular date (a) the
closing bid price per share of the Common Stock on such date the Nasdaq SmallCap
Market, Nasdaq National Market or other registered national stock exchange on
which the Common Stock is then listed or if there is no such price on such date,
then the closing bid price on such exchange or quotation system on the date
nearest preceding such date, or (b) if the Common Stock is not listed then on
the Nasdaq SmallCap Market, Nasdaq National Market or any registered national
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stock exchange, the closing bid price for a share of Common Stock in the
over-the-counter market, as reported by NASDAQ or in the National Quotation
Bureau Incorporated or similar organization or agency succeeding to its
functions of reporting prices) at the close of business on such date, or (c) if
the Common Stock is not then reported by NASDAQ the National Quotation Bureau
Incorporated (or similar organization or agency succeeding to its functions of
reporting prices), then the average of the "Pink Sheet" quotes for the relevant
conversion period, as determined in good faith by the holder, or (d) if the
Common Stock is not then publicly traded the fair market value of a share of
Common Stock as determined by an Independent Appraiser selected in good faith by
the Majority Holders; provided, however, that the Issuer, after receipt of the
determination by such Independent Appraiser, shall have the right to select an
additional Independent Appraiser, in which case, the fair market value shall be
equal to the average of the determinations by each such Independent Appraiser;
and provided, further that all determinations of the Per Share Market Value
shall be appropriately adjusted for any stock dividends, stock splits or other
similar transactions during such period. The determination of fair market value
by an Independent Appraiser shall be based upon the fair market value of the
Issuer determined on a going concern basis as between a willing buyer and a
willing seller and taking into account all relevant factors determinative of
value, and shall be final and binding on all parties. In determining the fair
market value of any shares of Common Stock, no consideration shall be given to
any restrictions on transfer of the Common Stock imposed by agreement or by
federal or state securities laws, or to the existence or absence of, or any
limitations on, voting rights.
"Purchase Agreement" means the Common Stock Purchase Agreement
dated as of October 6, 2000 between the Issuer and the Holder.
"Securities" means any debt or equity securities of the
Issuer, whether now or hereafter authorized, any instrument convertible into or
exchangeable for securities or a security, and any option, warrant or other
right to purchase or acquire any security. "Security" means one of the
Securities.
"Securities Act" means the Securities Act of 1933, as amended,
or any similar federal statute then in effect.
"Subsidiary" means any corporation at least 50% of whose
outstanding Voting Stock shall at the time be owned directly or indirectly by
the Issuer or by one or more of its Subsidiaries, or by the Issuer and one or
more of its Subsidiaries.
"Term" has the meaning specified in Section 1 hereof.
"Trading Day" means (a) a day on which the Common Stock is
traded on the Nasdaq SmallCap Market, Nasdaq National Market or other registered
national stock exchange on which the Common Stock has been listed, or (b) if the
Common Stock is not listed on the Nasdaq SmallCap Market, Nasdaq National Market
or other registered national stock exchange on which the Common Stock has been
listed, a day on which the Common Stock is quoted in the over-the-counter
market, as reported by the OTC Bulletin Board, or (c) if the Common Stock is not
quoted on the OTC Bulletin Board, a day on which the Common Stock is quoted in
the over-the-counter market as reported by the National Quotation Bureau
Incorporated (or any similar organization or agency succeeding its functions of
reporting prices); provided, however, that in the event that the Common Stock is
not listed or quoted as set forth in (a), (b) and (c) hereof, then Trading Day
shall mean any day except Saturday, Sunday and any day which shall be a legal
holiday or a day on which banking institutions in the State of New York are
authorized or required by law or other government action to close.
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"Voting Stock", as applied to the Capital Stock of any
corporation, means Capital Stock of any class or classes (however designated)
having ordinary voting power for the election of a majority of the members of
the Board of Directors (or other governing body) of such corporation, other than
Capital Stock having such power only by reason of the happening of a
contingency.
"Warrants" means the Warrants issued and sold pursuant to the
Purchase Agreement, including, without limitation, this Warrant, and any other
warrants of like tenor issued in substitution or exchange for any thereof
pursuant to the provisions of Section 2(c), 2(d) or 2(e) hereof or of any of
such other Warrants.
"Warrant Price" means $______________, as such price may be
adjusted from time to time as shall result from the adjustments specified in
Section 4 herein.
"Warrant Share Number" means at any time the aggregate number
of shares of Warrant Stock which may at such time be purchased upon exercise of
this Warrant, after giving effect to all prior adjustments and increases to such
number made or required to be made under the terms hereof.
"Warrant Stock" means Common Stock issuable upon exercise of
any Warrant or Warrants or otherwise issuable pursuant to any Warrant or
Warrants.
8. Other Notices. In case at any time:
(A) the Issuer shall make any distributions to the holders of Common
Stock; or
(B) the Issuer shall authorize the granting to all holders of its Common Stock
of rights to subscribe for or purchase any shares of Capital Stock of any class
or of any Common Stock Equivalents or Convertible Securities or other rights; or
(C) there shall be any reclassification of the Capital Stock of the
Issuer; or
(D) there shall be any capital reorganization by the Issuer; or
(E) there shall be any (i) consolidation or merger involving the Issuer or (ii)
sale, transfer or other disposition of all or substantially all of the Issuer's
property, assets or business (except a merger or other reorganization in which
the Issuer shall be the surviving corporation and its shares of Capital Stock
shall continue to be outstanding and unchanged and except a consolidation,
merger, sale, transfer or other disposition involving a wholly-owned
Subsidiary); or
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(F) there shall be a voluntary or involuntary dissolution, liquidation or
winding-up of the Issuer or any partial liquidation of the Issuer or
distribution to holders of Common Stock;
then, in each of such cases, the Issuer shall give written notice to the Holder
of the date on which (i) the books of the Issuer shall close or a record shall
be taken for such dividend, distribution or subscription rights or (ii) such
reorganization, reclassification, consolidation, merger, disposition,
dissolution, liquidation or winding-up, as the case may be, shall take place.
Such notice also shall specify the date as of which the holders of Common Stock
of record shall participate in such dividend, distribution or subscription
rights, or shall be entitled to exchange their certificates for Common Stock for
securities or other property deliverable upon such reorganization,
reclassification, consolidation, merger, disposition, dissolution, liquidation
or winding-up, as the case may be. Such notice shall be given at least twenty
(20) days prior to the action in question and not less than twenty (20) days
prior to the record date or the date on which the Issuer's transfer books are
closed in respect thereto. The Issuer shall give to the Holder notice of all
meetings and actions by written consent of its stockholders, at the same time in
the same manner as notice of any meetings of stockholders is required to be
given to stockholders who do not waive such notice (or, if such actions require
no notice, then two (2) Trading Days written notice thereof describing the
matters upon which action is to be taken). The Holder shall have the right to
send two representatives selected by it to each meeting, who shall be permitted
to attend, but not vote at, such meeting and any adjournments thereof. This
Warrant entitles the Holder to receive copies of all financial and other
information distributed or required to be distributed to the holders of the
Common Stock.
9. Amendment and Waiver. Any term, covenant, agreement or condition in this
Warrant may be amended, or compliance therewith may be waived (either generally
or in a particular instance and either retroactively or prospectively), by a
written instrument or written instruments executed by the Issuer and the
Majority Holders; provided, however, that no such amendment or waiver shall
reduce the Warrant Share Number, increase the Warrant Price, shorten the period
during which this Warrant may be exercised or modify any provision of this
Section 9 without the consent of the Holder of this Warrant.
10. Governing Law. THIS WARRANT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO
PRINCIPLES OF CONFLICTS OF LAW. THIS WARRANT SHALL NOT BE INTERPRETED OR
CONSTRUED WITH ANY PRESUMPTION AGAINST THE PARTY CAUSING THIS WARRANT TO BE
DRAFTED.
11. Notices. Any and all notices or other communications or deliveries
required or permitted to be provided hereunder shall be in writing and shall be
deemed given and effective on the earlier of (i) the date of transmission, if
such notice or communication is delivered via facsimile at the facsimile
telephone number specified for notice prior to 5:00 p.m., eastern standard time,
on a Trading Day, (ii) the Trading Day after the date of transmission, if such
notice or communication is delivered via facsimile at the facsimile telephone
number specified for notice later than 5:00 p.m., eastern standard time, on any
date and earlier than 11:59 p.m., eastern standard time, on such date, (iii) the
Trading Day following the date of mailing, if sent by nationally recognized
overnight courier service or (iv) actual receipt by the party to whom such
notice is required to be given. The addresses for such communications shall be
with respect to the Holder of this Warrant or of Warrant Stock issued pursuant
hereto, addressed to such Holder at its last known address or facsimile number
appearing on the books of the Issuer maintained for such purposes, or with
respect to the Issuer, addressed to:
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<PAGE>
Magnitude Information Systems, Inc.
401 Route 24
Chester, NJ 07930
Tel. No.: (908) 879-2722
Fax No.: (908) 879-7006
Attention: [__]
or to such other address or addresses or facsimile number or numbers as any such
party may most recently have designated in writing to the other parties hereto
by such notice. Copies of notices to the Issuer shall be sent to Joseph J.
Tomasek, Esq., 77 North Bridge Street, Somerville, NJ 08876, Facsimile no.:
(908) 429-0040. Copies of notices to the Holder shall be sent to Parker Chapin
LLP, 405 Lexington Avenue, New York, New York 10174, Attention: Christopher S.
Auguste, Esq., Facsimile no.: (212) 704-6288.
12. Warrant Agent. The Issuer may, by written notice to each Holder of this
Warrant, appoint an agent having an office in New York, New York for the purpose
of issuing shares of Warrant Stock on the exercise of this Warrant pursuant to
subsection (b) of Section 2 hereof, exchanging this Warrant pursuant to
subsection (d) of Section 2 hereof or replacing this Warrant pursuant to
subsection (d) of Section 3 hereof, or any of the foregoing, and thereafter any
such issuance, exchange or replacement, as the case may be, shall be made at
such office by such agent.
13. Remedies. The Issuer stipulates that the remedies at law of the Holder
of this Warrant in the event of any default or threatened default by the Issuer
in the performance of or compliance with any of the terms of this Warrant are
not and will not be adequate and that, to the fullest extent permitted by law,
such terms may be specifically enforced by a decree for the specific performance
of any agreement contained herein or by an injunction against a violation of any
of the terms hereof or otherwise.
14. Successors and Assigns. This Warrant and the rights evidenced hereby
shall inure to the benefit of and be binding upon the successors and assigns of
the Issuer, the Holder hereof and (to the extent provided herein) the Holders of
Warrant Stock issued pursuant hereto, and shall be enforceable by any such
party.
15. Modification and Severability. If, in any action before any court or
agency legally empowered to enforce any provision contained herein, any
provision hereof is found to be unenforceable, then such provision shall be
deemed modified to the extent necessary to make it enforceable by such court or
agency. If any such provision is not enforceable as set forth in the preceding
sentence, the unenforceability of such provision shall not affect the other
provisions of this Warrant, but this Warrant shall be construed as if such
unenforceable provision had never been contained herein.
16. Headings. The headings of the Sections of this Warrant are for
convenience of reference only and shall not, for any purpose, be deemed a part
of this Warrant.
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IN WITNESS WHEREOF, the Issuer has executed this Warrant as of the day
and year first above written.
MAGNITUDE INFORMATION SYSTEMS, INC.
By:
Name:
Title:
<PAGE>
EXERCISE FORM
[NAME OF ISSUER]
The undersigned _______________, pursuant to the provisions of the
within Warrant, hereby elects to purchase _____ shares of Common Stock of
___________________ covered by the within Warrant.
Dated: _________________ Signature ___________________________
Address _____________________
---------------------
ASSIGNMENT
FOR VALUE RECEIVED, _________________ hereby sells, assigns and
transfers unto __________________ the within Warrant and all rights evidenced
thereby and does irrevocably constitute and appoint _____________, attorney, to
transfer the said Warrant on the books of the within named corporation.
Dated: _________________ Signature ___________________________
Address _____________________
---------------------
PARTIAL ASSIGNMENT
FOR VALUE RECEIVED, _________________ hereby sells, assigns and
transfers unto __________________ the right to purchase _________ shares of
Warrant Stock evidenced by the within Warrant together with all rights therein,
and does irrevocably constitute and appoint ___________________, attorney, to
transfer that part of the said Warrant on the books of the within named
corporation.
Dated: _________________ Signature ___________________________
Address _____________________
--------------------
FOR USE BY THE ISSUER ONLY:
This Warrant No. W-__ canceled (or transferred or exchanged) this _____
day of ___________, _____, shares of Common Stock issued therefor in the name of
_______________, Warrant No. W-__ issued for ____ shares of Common Stock in the
name of _______________.
Exhibit 5.1
Joseph J. Tomasek, Esq.
75-77 North Bridge Street
Somerville, New Jersey 08876
October 30, 2000
Board of Directors
Magnitude Information Systems, Inc.
401 State Route 24
Chester, New Jersey 07930
Re: Common Stock of Magnitude Information Systems, Inc.
Gentlemen:
We act as counwel to Magnitude Information Systems, Inc. (the
"Company"), a Delaware corporation, in connection with the registration under
the Securities Act of 1933, as amended (the "Securities Act"), of 3,579,545
shares of the Company's Common Stock (the "Shares"), including shares underlying
warrants, which may be resold by Torneaux Fund Ltd., the selling stocholder, all
as further described in a registration statement on Form SB-2 filed under the
Securities Act (the "Registration Statement").
For the purpose of rendering this opinion, we examined originals or
photostatic copies of such documents as we deemed to be relevant. In conducting
our examination, we assumed, without investigation, the genuineness of all
signatures, the correctness of all certificates, the authenticity of all
documents submitted to us as originals, the conformity to original documents of
all documents submitted to us as certified or photostatic copies and the
authenticity of the originals of such copies, and the accuracy and completeness
of all records made available to us by the Company. In addition, in rendering
this opinion, we assumed that the Shares will be offered in the manner and on
the terms identified or referred to in the prospectus, including all amendments
thereto.
Our opinion is limited solely to matters set forth herein. We are
admitted to practice in the State of New Jersey and we express no opinion as to
the laws of any other jurisdiction other than the laws of the State of Delaware
and the laws of the United States.
Based upon and submect to the foregoing, after giving due regard to
such issues of law as we deemed relevant, and assuming that (i) the Registration
Statement becomes and remains effective, and the prospectus which is part
thereof (the "Prospectus"), and the Prospectus delivery procedures with respect
thereto, fulfill all of the requirements of the Securities Act, throughout all
periods relevant to the opinion, and (ii) all offers and sales of the Shares
have been and will be made in compliance with the securities laws of the states,
having jurisdiction thereof, we are of the opinion that the Shares offered by
the Selling Stockholder has been, and the Shares to be issued upon the exercise
of warrants for adequate consideration will be, validly issued, fully paid, and
nonassessable.
We hereby consent in writing to the use of our opinion as an exhibit to
the Registration Statement and any amendment thereto.
Very truly yours,
/s/ Joseph J. Tomasek,
Joseph J. Tomasek, Esq.
<PAGE>
Rosenberg Rich Baker Berman & Company
380 Foothill Road
Bridgewater, NJ 08807
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Magnitude Information Systems, Inc. and Subsidiaries
As independent public accountants, we hereby consent to the inclusion in the
Prospectus forming a part of Form SB-2 Registration Statement of Magnitude
Information Systems, Inc. and Subsidiaries to be filed with the Commission on or
about October 30, 2000 of (1) our report dated March 24, 2000 on the
consolidated financial statements of Magnitude Information Systems, Inc. and
Subsidiaries for the fiscal years ended December 31, 1999 and 1998 and (2) our
report dated April 7, 1999 on the consolidated financial statements of Magnitude
Information Systems, Inc. and Subsidiaries for the fiscal years ended December
31, 1998 and 1997, and to all references to our Firm included in this
Registration Statement.
/s/Rosenberg Rich Baker Berman & Company
Rosenberg Rich Baker Berman & Company
Bridgewater, New Jersey
August 30, 2000
